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<SEC-DOCUMENT>0000950148-04-000197.txt : 20040130
<SEC-HEADER>0000950148-04-000197.hdr.sgml : 20040130
<ACCEPTANCE-DATETIME>20040130145427
ACCESSION NUMBER:		0000950148-04-000197
CONFORMED SUBMISSION TYPE:	8-K
PUBLIC DOCUMENT COUNT:		9
CONFORMED PERIOD OF REPORT:	20040127
ITEM INFORMATION:		Other events
FILED AS OF DATE:		20040130

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			VIRCO MFG CORPORATION
		CENTRAL INDEX KEY:			0000751365
		STANDARD INDUSTRIAL CLASSIFICATION:	PUBLIC BUILDING AND RELATED FURNITURE [2531]
		IRS NUMBER:				951613718
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			0131

	FILING VALUES:
		FORM TYPE:		8-K
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	001-08777
		FILM NUMBER:		04555576

	BUSINESS ADDRESS:	
		STREET 1:		2027 HARPERS WAY
		CITY:			TORRANCE
		STATE:			CA
		ZIP:			90501
		BUSINESS PHONE:		3105330474

	MAIL ADDRESS:	
		STREET 1:		P O BOX 44846
		CITY:			LOS ANGELES
		STATE:			CA
		ZIP:			90044
</SEC-HEADER>
<DOCUMENT>
<TYPE>8-K
<SEQUENCE>1
<FILENAME>v96066e8vk.htm
<DESCRIPTION>FORM 8-K
<TEXT>
<HTML>
<HEAD>
<TITLE>Virco Mfg. Corporation</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<P align="center"><FONT size="4"><B>SECURITIES AND EXCHANGE COMMISSION</B>
</FONT>

<P align="center"><FONT size="3"><B>Washington, D.C. 20549</B>
</FONT>

<P align="center"><FONT size="5"><B>FORM 8-K</B>
</FONT>

<P align="center"><FONT size="3"><B>CURRENT REPORT</B>
</FONT>

<P align="center"><FONT size="3">Pursuant to Section&nbsp;13 or 15(d) of the Securities Exchange Act of 1934
</FONT>

<P align="center"><FONT size="2">Date of Report (Date of earliest event reported): January&nbsp;27, 2004
</FONT>

<P align="center"><FONT size="2">Commission file number 1-8777
</FONT>

<P align="center"><FONT size="6"><B>VIRCO MFG. CORPORATION</B>
</FONT>

<P align="center"><FONT size="2">(Exact name of registrant as specified in its charter)
</FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="95%">
<TR valign="bottom">
    <TD width="50%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="45%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><FONT size="2">DELAWARE</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top"><FONT size="2">
95-1613718</FONT></TD>
</TR>
<TR>
    <TD align="center" valign="top"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top"><FONT size="2">
<HR size="1" noshade></FONT></TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><FONT size="2">(State or other jurisdiction of incorporation or organization)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top"><FONT size="2">
(IRS Employer Identification No.)</FONT></TD>
</TR>

<TR valign="bottom">
    <TD align="center" valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD align="center" valign="top"><FONT size="2">2027 Harpers Way, Torrance, California</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top"><FONT size="2">
90501</FONT></TD>
</TR>
<TR>
    <TD align="center" valign="top"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top"><FONT size="2">
<HR size="1" noshade></FONT></TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><FONT size="2">(Address of principal executive officer)
</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top"><FONT size="2">
(Zip Code)
</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center"><FONT size="2">Registrant&#146;s telephone number, including area code (310)&nbsp;533-0474
</FONT>


<P align="center"><FONT size="2">1</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>



<P align="center"><FONT size="2"><B>INFORMATION TO BE INCLUDED IN THE REPORT</B>
</FONT>

<P align="left"><FONT size="2"><B>ITEM 5. OTHER EVENTS AND REQUIRED FD DISCLOSURE</B>
</FONT>

<P align="left"><FONT size="2">On January&nbsp;29, 2004, Virco Mfg. Corporation (the &#147;Company&#148;) issued a press
release announcing that it has completed its new financing agreement with Wells
Fargo Bank. The press release and the new financing agreement are attached
hereto as exhibits and are hereby incorporated in their entirety by reference.
</FONT>
<P align="center"><FONT size="2"><B>SIGNATURES</B>
</FONT>

<P align="left"><FONT size="2">Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%">
<TR valign="bottom">
    <TD width="39%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="5" valign="top" align="left"><FONT size="2"><B>&nbsp;&nbsp;Virco Mfg. Corporation</B></FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">Date: January&nbsp;29, 2004</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
By:
</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;/S/ Robert A. Virtue</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" valign="top" align="left"><FONT size="2"><HR size="1" noshade>
&nbsp;&nbsp;&nbsp; Robert A. Virtue<br>
&nbsp;&nbsp;&nbsp; Chief Executive Officer and<br>
&nbsp;&nbsp;&nbsp; Chairman of the Board of Directors</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center"><FONT size="2">2</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<P align="center"><FONT size="2"><B>INDEX TO EXHIBITS</B>
</FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="75%">
<TR valign="bottom">
    <TD width="9%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="86%">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD nowrap align="center"><FONT size="1"><B>Exhibit Number</B></FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center"><FONT size="1"><B>Description</B></FONT></TD>
</TR>
<TR valign="bottom">
    <TD nowrap align="center"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD nowrap align="center"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
    <TD  align="center" valign="top"><FONT size="2">99.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Press Release dated January&nbsp;29, 2004.</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD  align="center" valign="top"><FONT size="2">99.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Amended and Restated Credit Agreement
dated January&nbsp;27, 2004 between the Company and Wells Fargo Bank, N.A., a
national banking association.</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD  align="center"  valign="top"><FONT size="2">99.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Subsidiary Guaranty dated January&nbsp;27, 2004
between Virco Mgmt. Corporation and Wells Fargo Bank, N.A., a national
banking association.</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD  align="center" valign="top"><FONT size="2">99.4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Subsidiary Guaranty dated January&nbsp;27, 2004
between Virco, Inc. and Wells Fargo Bank, N.A., a national banking
association.</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD  align="center" valign="top"><FONT size="2">99.5</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Revolving Line of Credit Note dated
January&nbsp;27, 2004 of the Company in favor of Wells Fargo Bank, N.A., a
national banking association.</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD  align="center" valign="top"><FONT size="2">99.6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Term Note dated January&nbsp;27, 2004 of the
Company in favor of Wells Fargo Bank, N.A., a national banking
association.</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD  align="center" valign="top"><FONT size="2">99.7</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Amended and Restated Security Agreement dated January&nbsp;27, 2004
between the Company, Virco Mgmt. Corporation, Virco, Inc. and Wells
Fargo Bank, N.A., a national banking association.</FONT></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD  align="center" valign="top"><FONT size="2">99.8</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top"><FONT size="2">
Mortgage Secure Note dated January&nbsp;27, 2004 Between the Company and
Wells Fargo Bank, N. A., a national banking association.</FONT></TD>
</TR>
</TABLE>
</CENTER>

<P align="center"><FONT size="2">3</FONT>



</BODY>
</HTML>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>3
<FILENAME>v96066exv99w1.txt
<DESCRIPTION>EXHIBIT 99.1
<TEXT>
<PAGE>

EXHIBIT 99.1

FOR IMMEDIATE RELEASE
                                     Contact:
                                     Robert A. Virtue, President
                                     Douglas A. Virtue, Executive Vice President
                                     Robert E. Dose, Chief Financial Officer
                                     Virco Mfg. Corporation
                                     (310) 533-0474

           Virco(R) Announces New Financing Agreement With Wells Fargo

Torrance, California - January 29, 2004: Virco Mfg. Corporation (AMEX: VIR)
announced today that it has completed its new financing agreement with Wells
Fargo in the following letter to shareholders from Robert A. Virtue, President
and CEO:

I'm pleased to report that under the terms of a new hybrid loan structure, we
will be continuing the financial partnership we have enjoyed with Wells Fargo
since 1989. The loan combines elements of traditional cash flow and asset-based
financing and has been carefully designed to provide adequate liquidity for
fiscal 2004.

The loan package provides for $57,500,000 of working capital, $12,500,000 of
which is a term loan. The balance of $45,000,000 is a seasonal revolver that
will be used to finance inventories and peak season receivables.

Although demand in our core public school market remains soft because of state
budget shortfalls, covenants in the new loan are structured for current levels
of business. For investors with access to the SEC's EDGAR system, the loan
package can be reviewed on-line.

All statements in this press release that do not directly and exclusively relate
to historical facts constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements
represent the Company's intentions, plans, expectations and beliefs, and are
subject to risks, uncertainties and other factors, many of which are outside the
Company's control. These factors could cause actual results to differ materially
from such forward-looking statements. For a written description of these
factors, see the section titled "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" in the Company's Form 10-Q for
the quarter ended October 31, 2003. The Company disclaims any intention or
obligation to update these forward-looking statements whether as a result of
subsequent events or otherwise except as required by law.

                                       1

<PAGE>

                                                                  EXECUTION COPY

Exhibit 99.2

                              AMENDED AND RESTATED

                                CREDIT AGREEMENT

                          Dated as of January 27, 2004

                                     between

                             VIRCO MFG. CORPORATION,

                                  as Borrower,

                                       and

                     WELLS FARGO BANK, NATIONAL ASSOCIATION,

                                     as Bank

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                      Page
                                                                                                                      ----
<S>                                                                                                                   <C>
ARTICLE I  CREDIT TERMS..........................................................................................       1

         Section 1.1.      Line Of Credit; Term Loan.............................................................       1

         Section 1.2.      Interest/Fees.........................................................................       2

         Section 1.3.      Collection Of Payments................................................................       3

ARTICLE II  REPRESENTATIONS AND WARRANTIES.......................................................................       4

         Section 2.1.      Legal Status..........................................................................       4

         Section 2.2.      Authorization And Validity............................................................       4

         Section 2.3.      No Violation..........................................................................       4

         Section 2.4.      Litigation............................................................................       4

         Section 2.5.      Correctness Of Financial Statement....................................................       4

         Section 2.6.      Income Tax Returns....................................................................       5

         Section 2.7.      No Subordination......................................................................       5

         Section 2.8.      Permits, Franchises...................................................................       5

         Section 2.9.      ERISA.................................................................................       5

         Section 2.10.     Other Obligations.....................................................................       5

         Section 2.11.     Environmental Matters.................................................................       5

         Section 2.12.     No Encumbrances.......................................................................       6

         Section 2.13.     Eligible Accounts.....................................................................       6

         Section 2.14.     Eligible Inventory....................................................................       6

         Section 2.15      Solvency..............................................................................       6

         Section 2.16.     Indebtedness..........................................................................       6

         Section 2.17.     Inactive Subsidiaries.................................................................       6

ARTICLE III  CONDITIONS..........................................................................................       7
</TABLE>

                                                                               i

<PAGE>

                                TABLE OF CONTENTS
                                  (CONTINUED)

<TABLE>
<CAPTION>
                                                                                                                   Page
                                                                                                                   ----
<S>                                                                                                                <C>
         Section 3.1.      Conditions Of Initial Extension Of Credit............................................     7

         Section 3.2.      Conditions Of Each Extension Of Credit...............................................     9

ARTICLE IV  AFFIRMATIVE COVENANTS...............................................................................     9

         Section 4.1.      Punctual Payments....................................................................     9

         Section 4.2.      Accounting Records...................................................................     9

         Section 4.3.      Financial Statements and Reports.....................................................     9

         Section 4.4       Collateral Reporting.................................................................    10

         Section 4.5.      Compliance...........................................................................    11

         Section 4.6.      Insurance............................................................................    12

         Section 4.7.      Facilities...........................................................................    12

         Section 4.8.      Taxes And Other Liabilities..........................................................    12

         Section 4.9       Existence............................................................................    12

         Section 4.10.     Interest Rate Hedging Arrangements...................................................    12

         Section 4.11.     Notice To Bank.......................................................................    13

         Section 4.12.     Right to Inspect.....................................................................    13

ARTICLE V  NEGATIVE COVENANTS...................................................................................    13

         Section 5.1.      Use Of Funds.........................................................................    13

         Section 5.2.      Capital Expenditures.................................................................    13

         Section 5.3.      Lease Expenditures...................................................................    13

         Section 5.4.      Other Indebtedness...................................................................    14

         Section 5.5       Liens................................................................................    14

         Section 5.6.      Merger, Consolidation, Transfer Of Assets............................................    14

         Section 5.7.      Guaranties...........................................................................    15
</TABLE>

                                                                              ii

<PAGE>

                                TABLE OF CONTENTS
                                  (CONTINUED)

<TABLE>
<CAPTION>
                                                                                                                   Page
                                                                                                                   ----
<S>                                                                                                                <C>
         Section 5.8.      Loans, Advances, Investments.........................................................    15

         Section 5.9.      Dividends, Distributions.............................................................    15

         Section 5.10      Transactions with Affiliates.........................................................    15

         Section 5.11.     LC Usage Amount......................................................................    15

         Section 5.12.     Total Liabilities to Tangible Net Worth Ratio........................................    15

         Section 5.13.     Adjusted EBITDA Coverage Ratio.......................................................    16

         Section 5.14.     Leverage Ratio.......................................................................    16

         Section 5.15.     Quarterly Consolidated EBITDA........................................................    16

         Section 5.16      Inactive Subsidiaries................................................................    17

ARTICLE VI  EVENTS OF DEFAULT...................................................................................    17

         Section 6.1.      Events of Default....................................................................    17

         Section 6.2.      Remedies.............................................................................    19

ARTICLE VII  MISCELLANEOUS......................................................................................    20

         Section 7.1       No Waiver............................................................................    20

         Section 7.2.      Notices..............................................................................    20

         Section 7.3.      Costs, Expenses And Attorneys' Fees..................................................    20

         Section 7.4.      Successors, Assignment...............................................................    21

         Section 7.5.      Entire Agreement; Amendment..........................................................    21

         Section 7.6.      No Third Party Beneficiaries.........................................................    21

         Section 7.7.      Time.................................................................................    21

         Section 7.8.      Severability Of Provisions...........................................................    21

         Section 7.9.      Counterparts.........................................................................    22

         Section 7.10.     Governing Law........................................................................    22
</TABLE>

                                                                             iii

<PAGE>

                                TABLE OF CONTENTS
                                  (CONTINUED)

<TABLE>
<CAPTION>
                                                                                                           Page
                                                                                                           ----
<S>                                                                                                        <C>
Section 7.11.     Arbitration..........................................................................    22

Section 7.12.     Restatement of Prior Credit Agreement................................................    24
</TABLE>

EXHIBITS AND SCHEDULES

EXHIBIT A-1       FORM OF LINE OF CREDIT NOTE

EXHIBIT A-2       FORM OF TERM NOTE

EXHIBIT B         FORM OF BORROWING BASE CERTIFICATE

EXHIBIT C         FORM OF COMPLIANCE CERTIFICATE

SCHEDULE 2.11     ENVIRONMENTAL MATTERS

SCHEDULE E-1      EQUIPMENT/INVENTORY LOCATIONS

SCHEDULE R-1      REAL PROPERTY COLLATERAL

                                                                              iv

<PAGE>

                      AMENDED AND RESTATED CREDIT AGREEMENT

         AMENDED AND RESTATED CREDIT AGREEMENT dated as of January 27, 2004
("Agreement") between VIRCO MFG. CORPORATION, a Delaware corporation
("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").

                                    RECITALS

         A.       Bank and Borrower previously entered into that certain Credit
Agreement dated as of February 1, 2003 (as amended from time to time, the "Prior
Credit Agreement"), pursuant to which Bank extended to Borrower a line of credit
(the "Prior Line of Credit") with a subfeature for the issuance of letters of
credit (the "Prior Letters of Credit").

         B.       Bank and Borrower wish to amend and restate the Prior Credit
Agreement in its entirety with this Agreement to evidence the extension to
Borrower of the credit accommodations described below on the terms and
conditions contained herein.

         C.       Terms used in this Agreement shall have the meanings set forth
in Annex A, and, for purposes of this Agreement and the other Loan Documents,
the rules of construction set forth in Annex A shall govern.

         NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Bank and Borrower hereby agree as follows:

                                    ARTICLE I

                                  CREDIT TERMS

Section 1.1. Line Of Credit; Term Loan.

         (a)      Line of Credit. During the Line of Credit Period, Bank hereby
agrees, subject to the terms and conditions of this Agreement, to make advances
("Advances") to Borrower from time to time in an aggregate principal amount at
any time outstanding not to exceed the lesser of (i) the Maximum Line of Credit
Amount minus the Letter of Credit Usage or (ii) the Borrowing Base minus the
Letter of Credit Usage ("Line of Credit"). The proceeds of all advances made
hereby shall be used to finance Borrower's working capital requirements and to
refinance the amount outstanding under the Prior Line of Credit (which shall be
deemed cancelled hereby). Borrower's obligation to repay advances under the Line
of Credit shall be evidenced by a promissory note substantially in the form of
Exhibit A-1 attached hereto ("Line of Credit Note"), all terms of which are
incorporated herein by this reference.

         (b)      Letter of Credit Subfeature. As a subfeature under the Line of
Credit, Bank agrees from time to time during the term thereof to issue or cause
an affiliate to issue sight commercial or standby letters of credit for the
account of Borrower (each, a "Letter of Credit" and collectively, "Letters of
Credit"); provided however, Bank shall have no obligation to issue a Letter of
Credit if any of the following would result after giving effect to the requested
Letter of Credit: (i) the Letter of Credit Usage would exceed the Borrowing Base
less the then extant

                                                                               1

<PAGE>

amount of outstanding Advances, or (ii) the Letter of Credit Usage would exceed
$10,000,000, or (iii) the Letter of Credit Usage would exceed the Maximum Line
of Credit Amount less the then extant amount of outstanding Advances. The form
and substance of each Letter of Credit shall be subject to approval by Bank, in
its sole discretion. Each commercial Letter of Credit shall be issued for a term
not to exceed one hundred eighty (180) days, as designated by Borrower;
provided, however, that no commercial Letter of Credit shall have an expiration
date subsequent to the Line of Credit Termination Date. Each standby Letter of
Credit shall be issued for a term not to exceed twelve (12) months, as
designated by Borrower; provided, however, that no standby Letter of Credit
shall have an expiration date subsequent to the Line of Credit Termination Date.
Each Letter of Credit shall be subject to the additional terms and conditions of
the Letter of Credit agreements, applications and any related documents required
by Bank in connection with the issuance thereof. Each drawing paid under a
Letter of Credit shall be deemed an Advance under the Line of Credit and shall
be repaid by Borrower in accordance with the terms and conditions of this
Agreement applicable to such advances; provided, however, that if Advances under
the Line of Credit are not available, for any reason, at the time any drawing is
paid, then Borrower shall immediately pay to Bank the full amount drawn,
together with interest thereon from the date such drawing is paid to the date
such amount is fully repaid by Borrower, at the rate of interest applicable to
advances under the Line of Credit. In such event Borrower agrees that Bank, in
its sole discretion, may debit any account maintained by Borrower with Bank for
the amount of any such drawing. All Prior Letters of Credit which are
outstanding as of the date hereof shall be deemed "Letters of Credit" hereunder.

         (c)      Borrowing and Repayment. Borrower may from time to time during
the Line of Credit Period borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions contained herein or in the Line of Credit Note; provided, however,
that the total outstanding borrowings under the Line of Credit shall not at any
time exceed the maximum principal amount available thereunder, as set forth
above.

         (d)      Bank agrees, on the terms and conditions set forth in this
Agreement, to make a term loan (a "Term Loan") to the Borrower in a single
borrowing on the Closing Date, in a principal amount not to exceed $12,500,000.
Borrower's obligation to repay the Term Loan shall be evidenced by a promissory
note substantially in the form of Exhibit A-2 attached hereto ("Term Note"), all
terms of which are incorporated herein by this reference. Once the Term Loan has
been repaid it may not be reborrowed.

Section 1.2. Interest/Fees.

         (a)      Interest. The outstanding principal balance of the Line of
Credit and the Term Loan shall bear interest at the rate of interest set forth
in the Line of Credit Note or the Term Note, as the case may be.

         (b)      Computation and Payment. Interest shall be computed on the
basis of a 360-day year, actual days elapsed. Interest shall be payable at the
times and place set forth in each promissory note or other instrument or
document required hereby.

         (c)      Unused Commitment Fee. Borrower shall pay to Bank an unused
commitment fee on the 15th day of the month immediately following each fiscal
quarter end in an amount

                                                                               2

<PAGE>

equal to 0.375% per annum times the result of (i) the Maximum Line of Credit
Amount, less (ii) the sum of (A) the average daily balance of Advances that were
outstanding during the immediately preceding quarter, plus (B) the average daily
balance of Letters of Credit outstanding during the immediately preceding
quarter.

         (d)      Commercial Letter of Credit Fees. Borrower shall pay to Bank
fees upon the issuance of each commercial Letter of Credit, upon the payment or
negotiation by Bank of each draft under any commercial Letter of Credit and upon
the occurrence of any other activity with respect to any commercial Letter of
Credit (including without limitation, the transfer, amendment or cancellation of
any commercial Letter of Credit) determined in accordance with Bank's standard
fees and charges then in effect for such activity.

         (e)      Standby Letter of Credit Fees. Borrower shall pay to Bank (i)
fees upon the issuance of each standby Letter of Credit equal to 2.0% per annum
(computed on the basis of a 360-day year, actual days elapsed) of the face
amount thereof, and (ii) fees upon the payment or negotiation of each drawing
under any standby Letter of Credit and fees upon the occurrence of any other
activity with respect to any standby Letter of Credit (including without
limitation, the transfer, amendment or cancellation of any standby Letter of
Credit) determined in accordance with Bank's standard fees and charges then in
effect for such activity.

         (f)      Upfront Line of Credit Commitment Fee. Borrower shall pay to
Bank, on the Closing Date, an upfront Line of Credit commitment fee in an amount
equal to $112,500, such fee shall be fully earned and non-refundable when paid.

         (g)      Upfront Term Loan Commitment Fee. Borrower shall pay to Bank,
on the Closing Date, an upfront Term Loan commitment fee in an amount equal to
$31,250, such fee shall be fully earned and non-refundable when paid.

         (h)      Collateral Audits. Borrower shall pay to Bank its customary
fees plus reasonable out-of-pocket expenses for each financial or collateral
analysis and examination (i.e., audit) of Borrower and its Subsidiaries
performed by personnel employed by Bank (or the actual charges paid or incurred
by Bank if it elects to employ the services of one or more Persons to perform
such audits); provided, however that so long as no Event of Default has occurred
and is continuing, Borrower shall not be obligated to reimburse Bank the fees
and costs of more than two (2) audits in any fiscal year.

Section 1.3. Collection Of Payments.

         Borrower authorizes Bank to collect all interest and fees due under the
Line of Credit by charging Borrower's deposit account number 4648-052785 with
Bank, or any other deposit account maintained by Borrower with Bank, for the
full amount thereof. Should there be insufficient funds in any such deposit
account to pay all such sums when due, the full amount of such deficiency shall
be immediately due and payable by Borrower.

                                                                               3

<PAGE>

                                   ARTICLE II

                         REPRESENTATIONS AND WARRANTIES

         Borrower makes the following representations and warranties to Bank,
which representations and warranties shall survive the execution of this
Agreement and shall continue in full force and effect until the full and final
payment, and satisfaction and discharge, of all obligations of Borrower to Bank
subject to this Agreement.

Section 2.1. Legal Status.

         Borrower and each of its Subsidiaries is a corporation, duly organized
and existing and in good standing under the laws of its jurisdiction of
organization, and is qualified or licensed to do business (and is in good
standing as a foreign corporation, if applicable) in all jurisdictions in which
such qualification or licensing is required or in which the failure to so
qualify or to be so licensed could have a Material Adverse Change on Borrower or
such Subsidiary.

Section 2.2. Authorization And Validity.

         This Agreement and each other Loan Document has been duly authorized,
and upon its execution and delivery in accordance with the provisions hereof
will constitute a legal, valid and binding obligation of Borrower or Guarantor,
as the case may be, enforceable in accordance with their respective terms.

Section 2.3. No Violation.

         The execution, delivery and performance by Borrower and each of its
Subsidiaries of the Loan Documents to which each is a party do not violate any
provision of any law or regulation, or contravene any provision of the Governing
Documents of Borrower or such Subsidiary, or result in any breach of or default
under any contract, obligation, indenture or other instrument to which Borrower
or such Subsidiary is a party or by which Borrower or such Subsidiary may be
bound.

Section 2.4. Litigation.

         There are no pending, or to the best of Borrower's knowledge
threatened, actions, claims, investigations, suits or proceedings by or before
any Governmental Authority which could reasonably be expect to have a Material
Adverse Change.

Section 2.5. Correctness Of Financial Statement.

         The financial statements of Borrower dated October 31, 2003, a true
copy of which has been delivered by Borrower to Bank prior to the date hereof,
(a) is complete and correct and presents fairly the financial condition of
Borrower and its Subsidiaries, (b) discloses all liabilities of Borrower and its
Subsidiaries that are required to be reflected or reserved against under GAAP,
whether liquidated or unliquidated, fixed or contingent, and (c) has been
prepared in accordance with GAAP consistently applied. Since October 31, 2003
there has been no Material Adverse Change in the financial condition of
Borrower, nor has Borrower or any of its

                                                                               4

<PAGE>

Subsidiaries mortgaged, pledged, granted a security interest in or otherwise
encumbered any of its assets or properties except in favor of Bank.

Section 2.6. Income Tax Returns.

         Borrower has filed all federal, national, state, provincial, municipal,
and other tax returns and reports, if any, which are required to be filed (or
appropriate extensions have been timely filed) and has paid all taxes due
pursuant to such returns and reports or pursuant to any assessment received by
Borrower, except such taxes, if any, as are being contested in good faith and as
to which adequate reserves have been provided in accordance with GAAP and as to
which no Lien, other than a Permitted Lien, exists. The charges, accruals and
reserves on the books of Borrower in respect of any taxes or other governmental
charges are adequate.

Section 2.7. No Subordination.

         There is no agreement, indenture, contract or instrument to which
Borrower is a party or by which Borrower may be bound that requires the
subordination in right of payment of any of Borrower's obligations subject to
this Agreement to any other obligation of Borrower.

Section 2.8. Permits, Franchises.

         Borrower and each Subsidiary possesses, and will hereafter possess, all
permits, consents, approvals, franchises and licenses required and rights to all
trademarks, trade names, patents, and fictitious names, if any, necessary to
enable it to conduct the business in which it is now engaged in compliance with
applicable law.

Section 2.9. ERISA.

         Borrower is in compliance in all material respects with all applicable
provisions of the Employee Retirement Income Security Act of 1974, as amended or
recodified from time to time ("ERISA"); Borrower has not violated any provision
of any defined employee pension benefit plan (as defined in ERISA) maintained or
contributed to by Borrower (each, a "Plan"); no Reportable Event as defined in
ERISA has occurred and is continuing with respect to any Plan initiated by
Borrower; Borrower has met its minimum funding requirements under ERISA with
respect to each Plan; and each Plan will be able to fulfill its benefit
obligations as they come due in accordance with the Plan documents and under
generally accepted accounting principles.

Section 2.10. Other Obligations.

         Borrower is not in default on any Indebtedness or any other material
lease, commitment, contract, instrument or obligation.

Section 2.11. Environmental Matters.

         Except as set forth on Schedule 2.11, Borrower is in compliance in all
material respects with all applicable federal or state environmental, hazardous
waste, health and safety statutes, and any rules or regulations adopted pursuant
thereto, which govern or affect any of Borrower's operations and/or properties,
including without limitation, the Comprehensive Environmental

                                                                               5

<PAGE>

Response, Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act
of 1976, and the Federal Toxic Substances Control Act, as any of the same may be
amended, modified or supplemented from time to time. None of the operations of
Borrower or its Subsidiaries is the subject of any federal or state
investigation evaluating whether any remedial action involving a material
expenditure is needed to respond to a release of any toxic or hazardous waste or
substance into the environment. Neither the Borrower nor any of its Subsidiaries
has any material contingent liability in connection with any release of any
toxic or hazardous waste or substance into the environment.

Section 2.12. No Encumbrances.

         Borrower and its Subsidiaries have good and indefeasible title to their
personal property assets and good and marketable title to their Real Property,
in each case, free and clear of Liens except for Permitted Liens.

Section 2.13. Eligible Accounts.

         The Eligible Accounts are bona fide existing payment obligations of
Account Debtors created by the sale and delivery of Inventory or the rendition
of services to such Account Debtors in the ordinary course of Borrower's
business, owed to Borrower without any known defenses, disputes, offsets,
counterclaims, or rights of return or cancellation. As to each Account that is
identified by Borrower as an Eligible Account in a Borrowing Base Certificate
submitted to Bank, such Account is not excluded as ineligible by virtue of one
or more of the defining criteria set forth in the definition of Eligible
Accounts.

Section 2.14. Eligible Inventory.

         All Eligible Inventory is of good and merchantable quality, free from
known defects. As to each item of Inventory that is identified by Borrower as
Eligible Inventory in a Borrowing Base Certificate submitted to Bank, such
Inventory is not excluded as ineligible by virtue of one or more of the defining
criteria set forth in the definition of Eligible Inventory.

Section 2.15 Solvency.

         Borrower and each of its Subsidiaries is Solvent.

Section 2.16. Indebtedness.

         Immediately following the Closing Date Borrower has no Indebtedness
outstanding other than the Obligations and the IRB Indebtedness.

Section 2.17. Inactive Subsidiaries.

         Each of Delkay Plastics and Virtue of California, Inc. have no
Indebtedness or other liabilities, conduct no operations or business or own any
assets or properties.

                                                                               6

<PAGE>

                                   ARTICLE III

                                   CONDITIONS

Section 3.1. Conditions Of Initial Extension Of Credit.

         The obligation of Bank to extend any credit contemplated by this
Agreement is subject to the fulfillment to Bank's satisfaction of all of the
following conditions:

         (a)      Approval of Bank Counsel. All legal matters incidental to the
extension of credit by Bank shall be satisfactory to Bank's counsel.

         (b)      Documentation. Bank shall have received, in form and substance
satisfactory to Bank, each of the following, duly executed and delivered:

                  (i)      This Agreement.

                  (ii)     The Line of Credit Note.

                  (iii)    The Term Note.

                  (iv)     Each Guaranty.

                  (v)      The Security Agreement.

                  (vi)     The Mortgages and Mortgage Related Documents.

                  (vii)    The Loan Disbursement Order.

                  (viii)   Such other documents as Bank may require under any
         other Section of this Agreement.

         (c)      Authorization; Governing Documents; and Good Standing of
Borrower.

                  (i)      Bank shall have received a certificate from the
         Secretary of Borrower attesting to the resolutions of Borrower's Board
         of Directors authorizing its execution, delivery, and performance of
         this Agreement and the other Loan Documents to which Borrower is a
         party and authorizing specific officers of Borrower to execute the
         same;

                  (ii)     Bank shall have received copies of Borrower's
         Governing Documents, as amended, modified, or supplemented to the
         Closing Date, certified by the Secretary of Borrower;

                  (iii)    Bank shall have received a certificate of status with
         respect to Borrower, dated within 10 days of the Closing Date, such
         certificate to be issued by the appropriate officer of the jurisdiction
         of organization of Borrower, which certificate shall indicate that
         Borrower is in good standing in such jurisdiction; and

                                                                               7

<PAGE>

                  (iv)     Bank shall have received certificates of status with
         respect to Borrower, each dated within 30 days of the Closing Date,
         such certificates to be issued by the appropriate officer of the
         jurisdictions (other than the jurisdiction of organization of Borrower)
         in which its failure to be duly qualified or licensed would constitute
         a Material Adverse Change, which certificates shall indicate that
         Borrower is in good standing in such jurisdictions.

         (d)      Authorization; Governing Documents; and Good Standing of Each
Guarantor.
                  (i)      Bank shall have received a certificate from the
         Secretary of each Guarantor attesting to the resolutions of such
         Guarantor's board of directors authorizing its execution, delivery, and
         performance of the Loan Documents to which such Guarantor is a party
         and authorizing specific officers of such Guarantor to execute the
         same;

                  (ii)     Bank shall have received copies of each Guarantor's
         Governing Documents, as amended, modified, or supplemented to the
         Closing Date, certified by the Secretary of such Guarantor;

                  (iii)    Bank shall have received a certificate of status with
         respect to each Guarantor, dated within 10 days of the Closing Date,
         such certificate to be issued by the appropriate officer of the
         jurisdiction of organization of such Guarantor, which certificate shall
         indicate that Guarantor is in good standing in such jurisdiction; and

                  (iv)     Bank shall have received certificates of status with
         respect to each Guarantor, each dated within 30 days of the Closing
         Date, such certificates to be issued by the appropriate officer of the
         jurisdictions (other than the jurisdiction of organization of such
         Guarantor) in which its failure to be duly qualified or licensed would
         constitute a Material Adverse Change, which certificates shall indicate
         that such Guarantor is in good standing in such jurisdictions.

         (e)      Diligence. Bank shall have completed its business, legal, and
collateral due diligence, including a collateral audit and review of Borrower's
and its Subsidiaries' books and records and verification of Borrower's
representations and warranties to Bank, the results of which shall be
satisfactory to Bank.

         (f)      Appraisals. Bank shall have received an appraisal of the
Borrower's and its Subsidiaries' Equipment and the Real Property Collateral, the
results of which shall be satisfactory to Bank.

         (g)      Financial Condition. There shall have been no Material Adverse
Change, as determined by Bank, in the financial condition or business of
Borrower, nor any material decline, as determined by Bank, in the market value
of any Collateral required hereunder or a substantial or material portion of the
assets of Borrower.

         (h)      Insurance. Borrower shall have delivered to Bank evidence of
insurance coverage on all Borrower's property, in form, substance, amounts,
covering risks and issued by companies

                                                                               8

<PAGE>

satisfactory to Bank, and where required by Bank, with loss payable endorsements
in favor of Bank.

Section 3.2. Conditions Of Each Extension Of Credit.

         The obligation of Bank to make each extension of credit requested by
Borrower hereunder shall be subject to the fulfillment to Bank's satisfaction of
each of the following conditions:

         (a)      Compliance. The representations and warranties contained
herein and in each of the other Loan Documents shall be true on and as of the
date of the signing of this Agreement and on the date of each extension of
credit by Bank pursuant hereto, with the same effect as though such
representations and warranties had been made on and as of each such date, and on
each such date, no Default or Event of Default shall have occurred and be
continuing.

         (b)      Injunctions. No injunction, writ, restraining order, or other
order of any nature restricting or prohibiting, directly or indirectly, the
extending of such credit shall have been issued and remain in force by any
Governmental Authority against Borrower, Bank, or any of their Affiliates.

         (c)      Documentation. Bank shall have received all additional
documents which may be required in connection with such extension of credit.

                                   ARTICLE IV

                              AFFIRMATIVE COVENANTS

         Borrower covenants that so long as Bank remains committed to extend
credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower shall, and shall cause each of its
Subsidiaries to:

Section 4.1. Punctual Payments.

         Punctually pay all principal, interest, fees or other liabilities due
under any of the Loan Documents at the times and place and in the manner
specified therein.

Section 4.2. Accounting Records.

         Maintain adequate books and records in accordance with generally
accepted accounting principles consistently applied, and permit any
representative of Bank, at any reasonable time, to inspect, audit and examine
such books and records, to make copies of the same, and to inspect the
properties of Borrower.

Section 4.3. Financial Statements and Reports.

         Provide to Bank all of the following, in form and detail satisfactory
to Bank:

                                                                               9

<PAGE>

         (a)      Annual Financial Statements. Not later than 90 days after and
as of the end of each fiscal year (i) audited financial statements of Borrower,
prepared by a certified public accountant acceptable to Bank and certified,
without any qualifications, by such accountants to have been prepared in
accordance with GAAP; and, if issued, a copy of such accountant's management
letter (such audited financial statements to include a balance sheet,
consolidated statements of income, a statement of cash flows and appropriate
footnotes and supporting consolidating information); and (ii) a certificate of
such accountants addressed to Bank stating that such accountants do not have
knowledge of the existence of any Default or Event of Default under Sections
5.2, 5.11, 5.12, 5.13, 5.14 or 5.15;

         (b)      Form 10-K. Not later than 90 days after and as of the end of
each fiscal year, Borrower's Annual Report Form 10-K as filed with the
Securities and Exchange Commission;

         (c)      Monthly Financial Statements. Not later than 45 days after and
as of the end of each month, a financial statement of Borrower, prepared by
Borrower, together with a certificate signed by the chief financial officer of
Borrower to the effect that the financial statements delivered thereby have been
prepared in accordance with GAAP (except for the lack of footnotes and being
subject to year-end audit adjustments) and fairly present in all material
respects the financial condition of Borrower and its Subsidiaries (such
financial statements to include a balance sheet and consolidated statements of
income);

         (d)      Form 10-Q. Not later than 45 days after and as of the end of
each fiscal quarter, Borrower's Quarterly Report Form 10-Q as filed with the
Securities and Exchange Commission;

         (e)      Projections. Not later than 60 days prior to end of each
fiscal year, Borrower's detailed monthly operating budget for the upcoming
fiscal year (such budget to include a projected balance sheet and statement of
income);

         (f)      Compliance Certificates. For each fiscal quarter that is a
date on which a financial covenant in Sections 5.2, 5.11, 5.12, 5.13, 5.14 or
5.15 is to be tested, a Compliance Certificate demonstrating in reasonable
detail, compliance with the applicable financial covenant for the date or period
covered thereby;

         (g)      Account Debtor Information. Not later than 30 days after July
31 and January 31 of each year, a detailed report setting forth a true and
complete list of all Account Debtors of Borrower and its Subsidiaries as of July
31 and January 31, respectively, together with the address, phone number and
name of the primary relationship contact for each Account Debtor;

         (h)      Public Reports. If and when filed by Borrower, copies of each
Form 8-K filed by Borrower with the Securities and Exchange Commission and any
other filings made by Borrower with the Securities and Exchange Commission; and

         (i)      Supplemental Information. from time to time such other
information as Bank may reasonably request.

Section 4.4 Collateral Reporting.

         Provide to Bank all of the following, in form and detail satisfactory
to Bank:

                                                                              10

<PAGE>

         (a)      Weekly Reports. If the date of determination is between April
1 and July 31, not later than Monday of each week for the week most recently
ended:

                  (i)      an aging of the Accounts of Borrower, together with a
         reconciliation to the detailed calculation of the Borrowing Base
         previously provided to Bank,

                  (ii)     an aging, by vendor, of the accounts payable and any
         book overdraft of Borrower and its Subsidiaries,

                  (iii)    Inventory reports specifying the cost of the
         Inventory of Borrower and its Subsidiaries, by category (i.e., by
         reference to whether such Inventory is raw material, work-in-process,
         "assemble-to-ship" component or finished goods Inventory), as adjusted
         to reflect the market value of such Inventory if lower than the cost
         thereof, with additional detail showing additions to and deletions
         therefrom, and

                  (iv)     a detailed calculation of the Borrowing Base
         (including detail regarding those Accounts of Borrower that are not
         Eligible Accounts), in the form of the Borrowing Base Certificate.

         (b)      Monthly Reports. If the date of determination is between
August 1 and March 31, not later than the 10th day of each month for the month
most recently ended:

                  (i)      an aging of the Accounts of Borrower, together with a
         reconciliation to the detailed calculation of the Borrowing Base
         previously provided to Bank,

                  (ii)     an aging, by vendor, of the accounts payable and any
         book overdraft of Borrower and its Subsidiaries,

                  (iii)    Inventory reports specifying the cost of the
         Inventory of Borrower and its Subsidiaries, by category (i.e., by
         reference to whether such Inventory is raw material, work-in-process,
         "assemble-to-ship" component or finished goods Inventory), as adjusted
         to reflect the market value of such Inventory if lower than the cost
         thereof, with additional detail showing additions to and deletions
         therefrom, and

                  (iv)     a detailed calculation of the Borrowing Base
         (including detail regarding those Accounts of Borrower that are not
         Eligible Accounts), in substantially the form of the Borrowing Base
         Certificate.

         (c)      Supplemental Information. Upon the request of Bank (i) copies
of invoices, purchase orders, credit memos, remittance advices, deposit slips,
shipping and delivery documents and (ii) such other reports as to the Collateral
or the financial condition of Borrower and its Subsidiaries as Bank may request.

Section 4.5. Compliance.

         Preserve and maintain all licenses, permits, governmental approvals,
rights, privileges and franchises necessary for the conduct of its business; and
comply with the provisions of all documents pursuant to which Borrower or a
Subsidiary is organized and/or which govern the

                                                                              11

<PAGE>

continued existence of Borrower or a Subsidiary and with the requirements of all
laws, rules, regulations and orders of any Governmental Authority applicable to
Borrower, its Subsidiaries and/or their businesses.

Section 4.6. Insurance.

         Maintain and keep in force insurance of the types and in amounts
customarily carried in lines of business similar to that of Borrower, including
but not limited to fire, extended coverage, public liability, flood, property
damage and workers' compensation, with all such insurance carried with companies
and in amounts satisfactory to Bank, and deliver to Bank from time to time at
Bank's request schedules setting forth all insurance then in effect. In
addition, Borrower shall deliver copies of all such policies to Bank with a
satisfactory lender's loss payable endorsement naming Bank as sole loss payee or
additional insured, as appropriate. Each policy of insurance or endorsement
shall contain a clause requiring the insurer to give not less than 30 days prior
written notice to Bank in the event of cancellation of the policy for any reason
whatsoever.

Section 4.7. Facilities.

         Keep all properties useful or necessary to the businesses of the
Borrower and its Subsidiaries in good repair and condition, and from time to
time make necessary repairs, renewals and replacements thereto so that such
properties shall be fully and efficiently preserved and maintained.

Section 4.8. Taxes And Other Liabilities.

         Pay and discharge when due any and all indebtedness, obligations,
assessments and taxes, both real or personal, including without limitation
federal and state income taxes and state and local property taxes and
assessments, except such (a) as Borrower may in good faith contest or as to
which a bona fide dispute may arise, and (b) for which Borrower has made
provision, to Bank's satisfaction, for eventual payment thereof in the event
Borrower is obligated to make such payment.

Section 4.9 Existence.

         At all times preserve and keep in full force and effect Borrower's and
its Subsidiaries valid existence and good standing and any rights and franchises
material to their businesses.

Section 4.10. Interest Rate Hedging Arrangements.

         At Bank's request, maintain interest rate Hedging Agreements
satisfactory to Bank (including, with respect to the term thereof, which term
shall not expire prior to the Term Loan Termination Date) in respect of not less
than 50% of the average principal balance of the Term Loan outstanding from time
to time. It being understood that the obligations of Borrower under such Hedging
Agreements shall be secured pari passu with the Obligations of the Borrower
under this Agreement and the other Loan Documents.

                                                                              12

<PAGE>

Section 4.11. Notice To Bank.

         Promptly give written notice to Bank in reasonable detail of: (a) the
occurrence of any Default or Event of Default; (b) any change in the name or the
organizational structure of Borrower; (c) the occurrence and nature of any
Reportable Event or Prohibited Transaction, each as defined in ERISA, or any
funding deficiency with respect to any Plan; (d) any unscheduled termination or
cancellation of any insurance policy which Borrower is required to maintain, or
any uninsured or partially uninsured loss through liability or property damage,
or through fire, theft or any other cause affecting Borrower's property in
excess of an aggregate of $500,000, (e) any demand for payment in excess of an
aggregate of $250,000 made of Borrower by any bonding company or (f) any
litigation pending or threatened against Borrower with a claim in excess of
$500,000, to the extent not covered by independent third party insurance as to
which the insurer has admitted coverage.

Section 4.12. Right to Inspect.

         Bank (through any of its officers, employees, or agents) shall have the
right, from time to time hereafter during regular business hours, to inspect
Borrower's books and records and to check, test, and appraise the Collateral in
order to verify Borrower's financial condition or the amount, quality, value,
condition or, or any other matter relating to, the Collateral.

                                    ARTICLE V

                               NEGATIVE COVENANTS

         Borrower covenants that so long as Bank remains committed to extend
credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower will not, and will cause each of its
Subsidiaries not to:

Section 5.1. Use Of Funds.

         Use any of the proceeds of any credit extended hereunder except for the
purposes stated in Article I hereof.

Section 5.2. Capital Expenditures.

         Make any additional investment in fixed assets in excess of an
aggregate of $3,500,000 for the fiscal year ending January 31, 2004, or in
excess of an aggregate of $5,000,000 during any subsequent fiscal year.

Section 5.3. Lease Expenditures.

         Incur new operating lease expense in excess of an aggregate of
$2,000,000 in any fiscal year; provided, however, that refinancings of existing
operating leases shall be excluded from the foregoing determination unless the
amounts due in respect of the new operating lease exceeds the amounts that were
payable under the refinanced lease.

                                                                              13

<PAGE>

Section 5.4.      Other Indebtedness.

         Create, incur, assume or permit to exist any Indebtedness, except

                  (a)      the Obligations;

                  (b)      the IRB Indebtedness;

                  (c)      $2,000,000 aggregate principal amount of Capital
         Lease Obligations owing to General Electric Capital Corporation (or an
         Affiliate thereof) so long as (i) such obligations are incurred solely
         in connection with the conversion of operating leases in effect on the
         Closing Date and (ii) the terms and conditions of such obligations are
         in all material respects identical to the converted operating leases.

Section 5.5 Liens.

         Create, incur, assume, or suffer to exist, directly or indirectly, any
Lien on or with respect to any of its assets, of any kind, whether now owned or
hereafter acquired, except ("Permitted Liens"):

                  (a)      Liens in favor of Bank;

                  (b)      Liens for unpaid taxes that either (i) are not yet
         delinquent or (ii) do not constitute an Event of Default hereunder;

                  (c)      Liens arising by operation of law in favor of
         warehousemen, landlords, carriers, mechanics, materialmen, laborers, or
         suppliers, incurred in the ordinary course of an Issuer's or
         Subsidiary's business and not in connection with the borrowing of
         money, and which Liens either (i) are for sums not yet delinquent or
         (ii) are being contested in good faith, and in any event do not secure
         liabilities greater than $250,000 in the aggregate;

                  (d)      with respect to any Real Property, easements, rights
         of way, and zoning restrictions that do not materially interfere with
         or impair the use or operation thereof; and

                  (e)      Liens securing the obligations described in Section
         5.4(c).

Section 5.6. Merger, Consolidation, Transfer Of Assets.

         Merge into or consolidate with any other entity; make any substantial
change in the nature of the business of Borrower and its Subsidiaries as
conducted as of the date hereof; acquire all or substantially all of the assets
of any other entity; nor sell, lease, transfer or otherwise dispose of any
assets of Borrower or any Subsidiary except:

                  (a)      dispositions of Inventory in the ordinary course of
         business;

                                                                              14

<PAGE>

                  (b)      disposition of obsolete or worn out Equipment in the
         ordinary course of business; and

                  (c)      the use or transfer of money or cash equivalents in a
         manner that is not prohibited by the terms of this Agreement or the
         other Loan Documents.

Section 5.7. Guaranties.

         Guarantee or become liable in any way as surety, endorser (other than
as endorser of negotiable instruments for deposit or collection in the ordinary
course of business), accommodation endorser or otherwise for any liabilities or
obligations of any other Person, except in respect of performance bonds, surety
or appeal bonds, notary public bonds and bonds in support of Borrower's prior
self insurance program (such bonds, not to exceed $225,000 in aggregate
principal amount), in each case issued in the ordinary course of business
consistent with past practice.

Section 5.8. Loans, Advances, Investments.

         Make any loans or advances to or Investments in any Person.

Section 5.9. Dividends, Distributions.

         Make any distribution or declare or pay any dividends (in cash or other
property, including stock of Borrower) on, or purchase, acquire, redeem, or
retire any of Borrower's stock, of any class, whether now or hereafter
outstanding.

Section 5.10 Transactions with Affiliates.

         Directly or indirectly enter into or permit to exist any transaction
with any Affiliate of Borrower except for transactions that are in the ordinary
course of Borrower's business, upon fair and reasonable terms, that are fully
disclosed to Bank, and that are no less favorable to Borrower than would be
obtained in an arm's length transaction with a non-Affiliate.

Section 5.11. LC Usage Amount.

         Permit the LC Usage Amount to exceed (i) $30,000,000 for a period of 30
consecutive days during the period commencing on August 1, 2004 through and
including October 30, 2004 or (ii) $15,000,000 for a period of 30 consecutive
days during the period commencing on November 1, 2004 through and including
January 31, 2005.

Section 5.12. Total Liabilities to Tangible Net Worth Ratio.

         Permit the ratio of Total Liabilities to Tangible Net Worth at any time
during any fiscal quarter of Borrower specified below to exceed the ratio
specified below for such fiscal quarter:

                                                                              15

<PAGE>

<TABLE>
<CAPTION>
                FISCAL QUARTER:                       RATIO:
- --------------------------------------------------------------
<S>                                                <C>
               January 31, 2004                    1.75 : 1.00
- --------------------------------------------------------------

                April 30, 2004                     2.25 : 1.00
- --------------------------------------------------------------

                 July 31, 2004                     2.25 : 1.00
- --------------------------------------------------------------

               October 31, 2004                    1.50 : 1.00
- --------------------------------------------------------------

               January 31, 2005                    1.50 : 1.00
- --------------------------------------------------------------

Each Fiscal Quarter Ended April 30 and July 31     2.00 : 1.00
                  thereafter
- --------------------------------------------------------------

 Each Fiscal Quarter Ended July 31 and October     1.50 : 1.00
                 31 thereafter
- --------------------------------------------------------------
</TABLE>

Section 5.13. Adjusted EBITDA Coverage Ratio.

         Permit the Adjusted EBITDA Coverage Ratio, as of January 31, 2005 to be
less than 1.25 : 1.00 and as of April 30, 2005 and as of the end of each fiscal
quarter of Borrower thereafter, to be less than 1.50 : 1.00.

Section 5.14. Leverage Ratio.

         Permit the Leverage Ratio at any time during any fiscal quarter of
Borrower specified below to be more than the ratio specified below for such
fiscal quarter:

<TABLE>
<CAPTION>
                FISCAL QUARTER:                     RATIO:
- -------------------------------------------------------------
<S>                                              <C>
               October 31, 2004                  10.00 : 1.00
- -------------------------------------------------------------

               January 31, 2005                   3.00 : 1.00
- -------------------------------------------------------------

Each Fiscal Quarter Ended April 30 and July 31    4.00 : 1.00
                  thereafter
- -------------------------------------------------------------

 Each Fiscal Quarter Ended July 31 and October    2.50 : 1.00
                 31 thereafter
- -------------------------------------------------------------
</TABLE>

Section 5.15. Quarterly Consolidated EBITDA.

         Permit Consolidated EBITDA for any fiscal quarter of Borrower to be
less than the amount specified below for such fiscal quarter:

                                                                              16

<PAGE>

<TABLE>
<CAPTION>
             FISCAL QUARTER:                    AMOUNT:
- ---------------------------------------------------------
<S>                                           <C>
            January 31, 2004                  ($9,250,000)
- ---------------------------------------------------------

             April 30, 2004                   ($2,000,000)
- ---------------------------------------------------------

              July 31, 2004                    $5,000,000
- ---------------------------------------------------------

            October 31, 2004                   $4,500,000
- ---------------------------------------------------------

January 31, 2005 and each Fiscal Quarter      ($3,000,000)
               thereafter
- ---------------------------------------------------------
</TABLE>

Section 5.16 Inactive Subsidiaries.

         Allow Delkay Plastics or Virtue of California, Inc. to incur any
Indebtedness or other liabilities, conduct any operations or business or own or
acquire any asset or properties.

         Section 5.17 Licensing Agreements.

         Enter into or assume any contract or agreement for the payment of
licensing royalties in excess of 6.0% of the sales price of the inventory
related to the licensed right.

                                   ARTICLE VI

                                EVENTS OF DEFAULT

Section 6.1. Events of Default.

         The occurrence of any of the following shall constitute an "Event of
Default" under this Agreement:

         (a)      Borrower shall fail to pay when due any principal, interest,
fees or other amounts payable under any of the Loan Documents.

         (b)      Any financial statement or certificate furnished to Bank in
connection with, or any representation or warranty made by Borrower or any other
party under this Agreement or any other Loan Document shall prove to be
incorrect, false or misleading in any material respect when furnished or made.

         (c)      Any default in the performance of or compliance with any
obligation, agreement or other provision contained in Section 4.1, 4.3, 4.4,
4.5, 4.8, 4.9, 4.10 or Article V of this Agreement.

                                                                              17

<PAGE>

         (d)      Any default in the performance of or compliance with any
obligation, agreement or other provision contained herein or in any other Loan
Document (other than those referred to in subsections (a), (b) and (c) above),
and with respect to any such default which by its nature can be cured, such
default shall continue for a period of twenty (20) days from its occurrence.

         (e)      Any default in the payment or performance of any obligation,
or any defined event of default, under the terms of any contract or instrument
(other than any of the Loan Documents) pursuant to which Borrower or any
Subsidiary has incurred any debt or other liability to any Person, including
Bank.

         (f)      (i) The filing of a notice of judgment lien against Borrower
or any Subsidiary; or (ii) the recording of any abstract of judgment against
Borrower or any Subsidiary in any county in which Borrower or such Subsidiary
has an interest in real property; or (iii) the service of a notice of levy
and/or of a writ of attachment or execution, or other like process, against the
assets of Borrower or any Subsidiary; or (iv) the entry of a judgment, order,
decree or arbitration award against Borrower or any Subsidiary; or (v) Borrower
or any of its Subsidiaries shall enter into any agreement to settle or
compromise any pending or threatened litigation, except in the case of clauses
(iv) and (v), if the payment on such award, settlement or compromise is covered
by third party insurance as to which the insurer has agreed in writing to make
such payment on behalf of Borrower or such Subsidiary.

         (g)      Borrower or any Guarantor shall become insolvent, or shall
suffer or consent to or apply for the appointment of a receiver, trustee,
custodian or liquidator of itself or any of its property, or shall generally
fail to pay its debts as they become due, or shall make a general assignment for
the benefit of creditors; Borrower or any Guarantor shall file a voluntary
petition in bankruptcy, or seeking reorganization, in order to effect a plan or
other arrangement with creditors or any other relief under the Bankruptcy Code,
or under any state or federal law granting relief to debtors, whether now or
hereafter in effect; or any involuntary petition or proceeding pursuant to the
Bankruptcy Code or any other applicable state or federal law relating to
bankruptcy, reorganization or other relief for debtors is filed or commenced
against Borrower or any Guarantor, or Borrower or any Guarantor shall file an
answer admitting the jurisdiction of the court and the material allegations of
any involuntary petition, or Borrower or any Guarantor shall be adjudicated a
bankrupt, or an order for relief shall be entered against Borrower or any
Guarantor by any court of competent jurisdiction under the Bankruptcy Code or
any other applicable state or federal law relating to bankruptcy, reorganization
or other relief for debtors.

         (h)      There shall exist or occur any event or condition which Bank
in good faith believes impairs, or is substantially likely to impair, the
prospect of payment or performance by Borrower or any Guarantor of its
obligations under any of the Loan Documents to which it is a party.

         (i)      The dissolution or liquidation of Borrower or any Guarantor;
or Borrower or any Guarantor, or any of their respective directors, stockholders
or members, shall take action seeking to effect the dissolution or liquidation
of Borrower or such Guarantor, as the case may be.

         (j)      A Change of Control shall occur.

                                                                              18

<PAGE>

         (k)      If any Loan Document that purports to create a Lien, shall,
for any reason, fail or cease to create a valid and perfected and, except to the
extent permitted by the terms hereof or thereof, first priority Lien on or
security interest in the Collateral covered thereby.

         (l)      Any provision of any Loan Document shall at any time for any
reason be declared to be null and void, or the validity or enforceability
thereof shall be contested by Borrower or any Subsidiary, or a proceeding shall
be commenced by Borrower or any Subsidiary, or by any governmental authority
having jurisdiction over Borrower or any Subsidiary, seeking to establish the
invalidity or unenforceability thereof, or Borrower or any Subsidiary shall deny
that it has any liability or obligation purported to be created under any Loan
Document, or Borrower or any Subsidiary shall challenge or contest in any
action, suit or proceeding the perfection or priority of any Lien granted to the
Bank.

         (m)      If there shall occur any event or condition that has had or
may reasonably be expected to have a Material Adverse Change.

         (n)      If a notice of Lien, levy, or assessment is filed of record
with respect to any of Borrower's or any of its Subsidiaries' assets by the
United States, or any department, agency, or instrumentality thereof, or by any
state, county, municipal, or governmental agency, or if any taxes or debts owing
at any time hereafter to any one or more of such entities becomes a Lien,
whether choate or otherwise, upon any Borrower's or any of its Subsidiaries'
assets and the same is not paid before such payment is delinquent, except in the
case of a notice of lien, levy or assessment filed by, or any taxes or debts
owing to, any state, county or other local governmental authority wherein the
obligation owing to such governmental authority does not exceed $10,000.

Section 6.2. Remedies.

         Upon the occurrence of any Event of Default: (a) all Obligations, any
term thereof to the contrary notwithstanding, shall at Bank's option, in the
case of an Event of Default arising under any clause of Section 6.1 other than
clauses (f) or (h), and, automatically without any action on the part of Bank,
in the case of an Event of Default under arising under clause (f) or (h) of
Section 6.1, and without notice become immediately due and payable without
presentment, demand, protest or notice of dishonor, all of which are hereby
expressly waived by Borrower; (b) the obligation, if any, of Bank to extend any
further credit under any of the Loan Documents shall immediately cease and
terminate; and (c) Bank shall have all rights, powers and remedies available
under each of the Loan Documents, or accorded by law, including without
limitation the right to resort to any or all security for any credit subject
hereto and to exercise any or all of the rights of a beneficiary or secured
party pursuant to applicable law. All rights, powers and remedies of Bank may be
exercised at any time by Bank and from time to time after the occurrence of an
Event of Default, are cumulative and not exclusive, and shall be in addition to
any other rights, powers or remedies provided by law or equity.

                                                                              19

<PAGE>

                                   ARTICLE VII

                                  MISCELLANEOUS

Section 7.1 No Waiver.

         No delay, failure or discontinuance of Bank in exercising any right,
power or remedy under any of the Loan Documents shall affect or operate as a
waiver of such right, power or remedy; nor shall any single or partial exercise
of any such right, power or remedy preclude, waive or otherwise affect any other
or further exercise thereof or the exercise of any other right, power or remedy.
Any waiver, permit, consent or approval of any kind by Bank of any breach of or
default under any of the Loan Documents must be in writing and shall be
effective only to the extent set forth in such writing.

Section 7.2. Notices.

         All notices, requests and demands which any party is required or may
desire to give to any other party under any provision of this Agreement must be
in writing delivered to each party at the following address:

         BORROWER:        VIRCO MFG. CORPORATION
                          2027 Harpers Way
                          Torrance, California 90501
                          Attn: Robert E. Dose
                          Chief Financial Officer

         BANK:            WELLS FARGO BANK, NATIONAL ASSOCIATION
                          San Gabriel Valley Regional Commercial Banking Office
                          1000 Lakes Drive, Suite 250
                          West Covina, CA 91790
                          Attn: Randall J. Repp
                          Vice President

or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.

Section 7.3. Costs, Expenses And Attorneys' Fees.

         Borrower shall pay to Bank immediately upon demand the full amount of
all payments, advances, charges, costs and expenses, including reasonable
attorneys' fees (to include outside counsel fees and all allocated costs of
Bank's in-house counsel), expended or incurred by Bank in connection with (a)
the negotiation and preparation of this Agreement and the other Loan Documents,
Bank's continued administration hereof and thereof, and the preparation of any
amendments and waivers hereto and thereto, (b) the enforcement of Bank's rights
and/or the collection of any amounts which become due to Bank under any of the
Loan Documents and

                                                                              20

<PAGE>

(c) the prosecution or defense of any action in any way related to any of the
Loan Documents, including without limitation, any action for declaratory relief,
whether incurred at the trial or appellate level, in an arbitration proceeding
or otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating to
Borrower or any other person or entity.

Section 7.4. Successors, Assignment.

         This Agreement shall be binding upon and inure to the benefit of the
heirs, executors, administrators, legal representatives, successors and assigns
of the parties; provided however, that Borrower may not assign or transfer its
interest hereunder without Bank's prior written consent. Bank reserves the right
to sell, assign, transfer, negotiate or grant participations in all or any part
of, or any interest in, Bank's rights and benefits under each of the Loan
Documents. In connection therewith, Bank may disclose all documents and
information which Bank now has or may hereafter acquire relating to any credit
subject hereto, Borrower or its business, or any collateral required hereunder.

Section 7.5. Entire Agreement; Amendment.

         This Agreement and the other Loan Documents constitute the entire
agreement between Borrower and Bank with respect to each credit subject hereto
and supersede all prior negotiations, communications, discussions and
correspondence concerning the subject matter hereof. This Agreement may be
amended or modified only in writing signed by each party hereto.

Section 7.6. No Third Party Beneficiaries.

         This Agreement is made and entered into for the sole protection and
benefit of the parties hereto and their respective permitted successors and
assigns, and no other person or entity shall be a third party beneficiary of, or
have any direct or indirect cause of action or claim in connection with, this
Agreement or any other of the Loan Documents to which it is not a party.

Section 7.7. Time.

         Time is of the essence of each and every provision of this Agreement
and each other of the Loan Documents.

Section 7.8. Severability Of Provisions.

         If any provision of this Agreement shall be prohibited by or invalid
under applicable law, such provision shall be ineffective only to the extent of
such prohibition or invalidity without invalidating the remainder of such
provision or any remaining provisions of this Agreement.

                                                                              21

<PAGE>

Section 7.9. Counterparts.

         This Agreement may be executed in any number of counterparts, each of
which when executed and delivered shall be deemed to be an original, and all of
which when taken together shall constitute one and the same Agreement.

Section 7.10. Governing Law.

         This Agreement shall be governed by and construed in accordance with
the laws of the State of California.

Section 7.11. Arbitration.

         (a)      Arbitration. The parties hereto agree, upon demand by any
party, to submit to binding arbitration all claims, disputes and controversies
between or among them (and their respective employees, officers, directors,
attorneys, and other agents), whether in tort, contract or otherwise arising out
of or relating to in any way (i) the loan and related Loan Documents which are
the subject of this Agreement and its negotiation, execution, collateralization,
administration, repayment, modification, extension, substitution, formation,
inducement, enforcement, default or termination; or (ii) requests for additional
credit.

         (b)      Governing Rules. Any arbitration proceeding will (i) proceed
in a location in California selected by the American Arbitration Association
("AAA"); (ii) be governed by the Federal Arbitration Act (Title 9 of the United
States Code), notwithstanding any conflicting choice of law provision in any of
the documents between the parties; and (iii) be conducted by the AAA, or such
other administrator as the parties shall mutually agree upon, in accordance with
the AAA's commercial dispute resolution procedures, unless the claim or
counterclaim is at least $1,000,000 exclusive of claimed interest, arbitration
fees and costs in which case the arbitration shall be conducted in accordance
with the AAA's optional procedures for large, complex commercial disputes (the
commercial dispute resolution procedures or the optional procedures for large,
complex commercial disputes to be referred to, as applicable, as the "Rules").
If there is any inconsistency between the terms hereof and the Rules, the terms
and procedures set forth herein shall control. Any party who fails or refuses to
submit to arbitration following a demand by any other party shall bear all costs
and expenses incurred by such other party in compelling arbitration of any
dispute. Nothing contained herein shall be deemed to be a waiver by any party
that is a bank of the protections afforded to it under 12 U.S.C. ss.91 or any
similar applicable state law.

         (c)      No Waiver of Provisional Remedies, Self-Help and Foreclosure.
The arbitration requirement does not limit the right of any party to (i)
foreclose against real or personal property collateral; (ii) exercise self-help
remedies relating to collateral or proceeds of collateral such as setoff or
repossession; or (iii) obtain provisional or ancillary remedies such as
replevin, injunctive relief, attachment or the appointment of a receiver, before
during or after the pendency of any arbitration proceeding. This exclusion does
not constitute a waiver of the right or obligation of any party to submit any
dispute to arbitration or reference hereunder, including those arising from the
exercise of the actions detailed in sections (i), (ii) and (iii) of this
paragraph.

                                                                              22

<PAGE>

         (d)      Arbitrator Qualifications and Powers. Any arbitration
proceeding in which the amount in controversy is $5,000,000 or less will be
decided by a single arbitrator selected according to the Rules, and who shall
not render an award of greater than $5,000,000. Any dispute in which the amount
in controversy exceeds $5,000,000 shall be decided by majority vote of a panel
of three arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations. The arbitrator will be a neutral
attorney licensed in the State of California or a neutral retired judge of the
state or federal judiciary of California, in either case with a minimum of ten
years experience in the substantive law applicable to the subject matter of the
dispute to be arbitrated. The arbitrator will determine whether or not an issue
is arbitratable and will give effect to the statutes of limitation in
determining any claim. In any arbitration proceeding the arbitrator will decide
(by documents only or with a hearing at the arbitrator's discretion) any
pre-hearing motions which are similar to motions to dismiss for failure to state
a claim or motions for summary adjudication. The arbitrator shall resolve all
disputes in accordance with the substantive law of California and may grant any
remedy or relief that a court of such state could order or grant within the
scope hereof and such ancillary relief as is necessary to make effective any
award. The arbitrator shall also have the power to award recovery of all costs
and fees, to impose sanctions and to take such other action as the arbitrator
deems necessary to the same extent a judge could pursuant to the Federal Rules
of Civil Procedure, the California Rules of Civil Procedure or other applicable
law. Judgment upon the award rendered by the arbitrator may be entered in any
court having jurisdiction. The institution and maintenance of an action for
judicial relief or pursuit of a provisional or ancillary remedy shall not
constitute a waiver of the right of any party, including the plaintiff, to
submit the controversy or claim to arbitration if any other party contests such
action for judicial relief.

         (e)      Discovery. In any arbitration proceeding discovery will be
permitted in accordance with the Rules. All discovery shall be expressly limited
to matters directly relevant to the dispute being arbitrated and must be
completed no later than 20 days before the hearing date and within 180 days of
the filing of the dispute with the AAA. Any requests for an extension of the
discovery periods, or any discovery disputes, will be subject to final
determination by the arbitrator upon a showing that the request for discovery is
essential for the party's presentation and that no alternative means for
obtaining information is available.

         (f)      Class Proceedings and Consolidations. The resolution of any
dispute arising pursuant to the terms of this Agreement shall be determined by a
separate arbitration proceeding and such dispute shall not be consolidated with
other disputes or included in any class proceeding.

         (g)      Payment Of Arbitration Costs And Fees. The arbitrator shall
award all costs and expenses of the arbitration proceeding.

         (h)      Real Property Collateral; Judicial Reference. Notwithstanding
anything herein to the contrary, no dispute shall be submitted to arbitration if
the dispute concerns indebtedness secured directly or indirectly, in whole or in
part, by any real property unless (i) the holder of the mortgage, lien or
security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits
that might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all indebtedness and obligations of the
parties, and all mortgages, liens and security interests securing such

                                                                              23

<PAGE>

indebtedness and obligations, shall remain fully valid and enforceable. If any
such dispute is not submitted to arbitration, the dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638 et
seq., and this general reference agreement is intended to be specifically
enforceable in accordance with said Section 638. A referee with the
qualifications required herein for arbitrators shall be selected pursuant to the
AAA's selection procedures. Judgment upon the decision rendered by a referee
shall be entered in the court in which such proceeding was commenced in
accordance with California Code of Civil Procedure Sections 644 and 645.

         (i)      Miscellaneous. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business or by applicable law or
regulation. If more than one agreement for arbitration by or between the parties
potentially applies to a dispute, the arbitration provision most directly
related to the Loan Documents or the subject matter of the dispute shall
control. This arbitration provision shall survive termination, amendment or
expiration of any of the Loan Documents or any relationship between the parties.

Section 7.12. Restatement of Prior Credit Agreement.

         Borrower and Bank hereby agree that as of the Closing Date (i) the
terms and provisions of the Prior Credit Agreement shall be and hereby are
amended, superceded and restated in their entirety by the terms and provisions
of this Agreement, (ii) Bank shall not have any obligations under the Prior
Credit Agreement, except to the extent that any such obligations may be restated
in this Agreement or in the other Loan Documents and (iii) the execution and
delivery of this Agreement shall not constitute or effect, or be deemed to
constitute or effect, a novation, refinancing, discharge, extinguishment or
refunding of any of the Indebtedness outstanding under the Prior Credit
Agreement or that portion of such Indebtedness that remain outstanding under
this Agreement.

                            [Signature Page Follows]

                                                                              24

<PAGE>

         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.

VIRCO MFG. CORPORATION                          WELLS FARGO BANK, NATIONAL
                                                ASSOCIATION

By:  /S/ Robert E. Dose                         By: /s/ Randall J. Repp
     Robert E. Dose                                 Randall J. Repp
     Vice President - Finance, Secretary and        Vice President
     Treasurer

                                                                              25

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2
<SEQUENCE>4
<FILENAME>v96066exv99w2.txt
<DESCRIPTION>EXHIBIT 99.2
<TEXT>
<PAGE>

                                     ANNEX A
                               to CREDIT AGREEMENT

                                  (DEFINITIONS)

          Capitalized terms used in the Loan Documents shall have (unless
otherwise provided elsewhere in the Loan Documents) the following respective
meanings.

     "Account" means an account (as that term is defined in the Code), and any
and all supporting obligations in respect thereof.

     "Account Debtor" means any Person who is obligated under, with respect to,
or on account of, an Account, chattel paper, or a General Intangible.

     "ACH Transactions" means any cash management or related services (including
the Automated Clearing House processing of electronic funds transfers through
the direct Federal Reserve Fedline system) provided by a Bank Product Provider
for the account of Borrower or its Subsidiaries.

     "Adjusted Consolidated EBITDA" means, with reference to any period, the
Consolidated EBITDA of Borrower and its Subsidiaries for such period plus, for
the fiscal year ended January 31, 2004, an amount not to exceed $15,000,000 for
severance charges incurred during such fiscal year.

     "Adjusted Consolidated EBITDA Coverage Ratio" means, at any time, the ratio
of (a) Adjusted Consolidated EBITDA for the four consecutive fiscal quarters
ended on or most recently to such date to (b) the sum of (i) Interest Expense
for the four consecutive fiscal quarters ended on or most recently to such date
plus (ii) the current portion of the long term Indebtedness of Borrower and its
Subsidiaries as of the end of the immediately preceding fiscal year.

     "Affiliate" means, as applied to any Person, any other Person who, directly
or indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, such Person. For purposes of this definition,
"control" means the possession, directly or indirectly through one or more
intermediaries, of the power to direct the management and policies of a Person,
whether through the ownership of stock, by contract, or otherwise; provided,
however, that, for purposes of the definition of Eligible Accounts and Section
5.10 hereof: (a) any Person which owns directly or indirectly 10% or more of the
Stock having ordinary voting power for the election of directors or other
members of the governing body of a Person or 10% or more of the partnership or
other ownership interests of a Person (other than as a limited partner of such
Person) shall be deemed an Affiliate of such Person, (b) each director (or
comparable manager) of a Person shall be deemed to be an Affiliate of such
Person and (c) each partnership or joint venture in which a Person is a partner
or joint venturer shall be deemed an Affiliate of such Person.

                                                                               1
<PAGE>

     "Bank Product" means any financial accommodation extended to Borrower or
its Subsidiaries by Bank including: (a) credit cards, (b) credit card processing
services, (c) debit cards, (d) purchase cards, (e) ACH Transactions, (f) cash
management, including controlled disbursement, accounts or services or (g)
transactions under Hedge Agreements.

     "Bank Product Agreements" means those agreements entered into from time to
time by Borrower or any of its Subsidiaries with Bank in connection with any
Bank Products.

     "Bank Product Obligations" means all obligations, liabilities, contingent
reimbursement obligations, fees, and expenses owing by Borrower or its
Subsidiaries to Bank pursuant to or evidenced by the Bank Product Agreements and
irrespective of whether for the payment of money, whether direct or indirect,
absolute or contingent, due or to become due, now existing or hereafter arising,
and including all such amounts that Borrower or its Subsidiaries are obligated
to reimburse to Bank as a result of Bank purchasing participations from, or
executing indemnities or reimbursement obligations to, Bank with respect to the
Bank Products provided by Bank to Borrower or its Subsidiaries.

     "Bankruptcy Code" means title 11 of the United States Code, as in effect
from time to time.

     "Borrower" has the meaning set forth in the preamble to this Agreement.

     "Borrowing Base" means, as of any date of determination, the result of:

               (a)  80% of the amount of Eligible Accounts, less the amount, if
          any, of the Dilution Reserve, plus

               (b) the lower of:

                    (i)  the Maximum Inventory Amount, and

                    (ii) the sum of:

                         (A)  the Designated Finished Goods Advance Rate of the
                    value of Eligible Finished Goods Inventory, plus

                         (B)  the Designated ATS Advance Rate of the value of
                    Eligible ATS Inventory, plus

                         (C)  50% of the value of Eligible Raw Material
                    Inventory, minus

               (c)  such reserves as the Bank, in the exercise of its reasonable
          credit judgment, determines are necessary or appropriate, including,
          without limitation, a $100,000 reserve for the payment of licensing
          royalties payable in connection with the sale of inventory.

                                                                               2
<PAGE>

     "Borrowing Base Certificate" means a certificate substantially in the form
of Exhibit B delivered by the chief financial officer of Borrower to Bank.

     "Business Day" means any day that is not a Saturday, Sunday, or other day
on which banks are authorized or required to close in the state of California,
except that, if a determination of a Business Day shall relate to a LIBOR rate
loan, the term "Business Day" also shall exclude any day on which banks are
closed for dealings in Dollar deposits in the London interbank market.

     "Capital Lease" means a lease that is required to be capitalized for
financial reporting purposes in accordance with GAAP.

     "Capitalized Lease Obligation" means that portion of the obligations under
a Capital Lease that is required to be capitalized in accordance with GAAP.

     "Cash Equivalents" means (a) marketable direct obligations issued or
unconditionally guaranteed by the United States or issued by any agency thereof
and backed by the full faith and credit of the United States, in each case
maturing within 1 year from the date of acquisition thereof, (b) marketable
direct obligations issued by any state of the United States or any political
subdivision of any such state or any public instrumentality thereof maturing
within 1 year from the date of acquisition thereof and, at the time of
acquisition, having one of the two highest ratings obtainable from either
Standard & Poor's Rating Group ("S&P") or Moody's Investor Service, Inc.
("Moody's"), (c) commercial paper maturing no more than 270 days from the date
of creation thereof and, at the time of acquisition, having a rating of at least
A-1, from S&P or at least P-1 from Moody's, (d) certificates of deposit or
bankers' acceptances maturing within 1 year from the date of acquisition thereof
issued by any bank organized under the laws of the United States or any state
thereof having at the date of acquisition thereof combined capital and surplus
of not less than $250,000,000, (e) demand Deposit Accounts maintained with any
bank organized under the laws of the United States or any state thereof so long
as the amount maintained with any individual bank is less than or equal to
$100,000 and is insured by the Federal Deposit Insurance Corporation and (f)
Investments in money market funds substantially all of whose assets are invested
in the types of assets described in clauses (a) through (e) above.

     "Change of Control" means that (a) any "person" or "group" (within the
meaning of Sections 13(d) and 14(d) of the Securities and Exchange Act of 1934,
as amended), other than members of the Virtue family, becomes the beneficial
owner (as defined in Rule 13d-3 under such Act), directly or indirectly, of 20%
or more, of the capital stock of Borrower having the right to vote for the
election of members of the Board of Directors or (b) a majority of the members
of the Board of Directors do not constitute Continuing Directors.

     "Closing Date" means the date of the making of the initial Advance and the
Term Loan (or other extension of credit) hereunder.

     "Code" means the California Uniform Commercial Code, as in effect from time
to time.

     "Collateral" means all assets and interests in assets and proceeds thereof
now owned or hereafter acquired by Borrower, any Guarantor or any of their
respective Subsidiaries in or upon which a Lien is granted to Bank under any of
the Loan Documents.

                                                                               3
<PAGE>

     "Collateral Access Agreement" means a landlord waiver, bailee letter, or
acknowledgement agreement of any lessor, warehouseman, processor, consignee, or
other Person in possession of, having a Lien upon, or having rights or interests
in Borrower's or its Subsidiaries' books and records, Equipment or Inventory, in
each case, in form and substance satisfactory to Bank.

     "Compliance Certificate" means a certificate substantially in the form of
Exhibit C delivered by the chief financial officer of Borrower to Bank.

     "Consolidated EBITDA" means, with reference to any period, Net Income for
such period plus the sum of all amounts deducted in determining such Net Income
in respect of (a) Interest Expense for such period, (b) federal, state and local
income taxes for such period and (c) depreciation of fixed assets and
amortization of intangible assets for such period; minus the sum of (x) gains
from sales of capital assets in such period, (y) any income or gain from
extraordinary items in such period and (z) income or gain from non-recurring
items in such period, in each case of clauses (a), (b), (c), (x) and (w), as
determined in accordance with GAAP.

     "Continuing Director" means (a) any member of the Board of Directors who
was a director (or comparable manager) of Borrower on the Closing Date, and (b)
any individual who becomes a member of the Board of Directors after the Closing
Date if such individual was appointed or nominated for election to the Board of
Directors by a majority of the Continuing Directors, but excluding any such
individual originally proposed for election in opposition to the Board of
Directors in office at the Closing Date in an actual threatened election contest
relating to the election of the directors (or comparable managers) of Borrower
and whose initial assumption of office resulted from such contest or the
settlement thereof.

     "Default" means an event, condition, or default that, with the giving of
notice, the passage of time, or both, would be an Event of Default.

     "Designated ATS Advance Rate" means, at any date, a percentage equal to (a)
if such date is on or after March 1 and on or before July 31 of each year, 50%
and (b) at all other times, 20%.

     "Designated Finished Goods Advance Rate" means, at any date, a percentage
equal to (a) if such date is on or after March 1 and on or before July 31 of
each year, 60% and (b) at all other times, 50%.

     "Dilution" means, at any date, a percentage, based upon the experience of
the immediately prior 30 consecutive days, that is the result of dividing the
Dollar amount of (a) bad debt write-downs, discounts, advertising allowances,
credits, returns of merchandise, freight allowances, notes taken in lieu of
payment, miscellaneous credits and adjustments, or other dilutive items with
respect to Borrower's Accounts during such period, by (b) Borrower's gross
billings with respect to Accounts during such period.

     "Dilution Reserve" means, as of any date of determination, an amount
sufficient to reduce the advance rate against Eligible Accounts as follows:

                                                                               4
<PAGE>

<TABLE>
<CAPTION>
        IF DILUTION IS:                                 THEN THE DILUTION RESERVE IS:
- ------------------------------------      -----------------------------------------------------
<S>                                       <C>
           Less than 5.0%                                      - 0 -
 5.0% or greater but less than 10.0%      An amount sufficient to reduce advance rates by 5.0%
10.0% or greater but less than 15.0%      An amount sufficient to reduce advance rates by 10.0%
15.0% or greater but less than 20.0%      An amount sufficient to reduce advance rates by 15.0%
20.0% or greater but less than 25.0%      An amount sufficient to reduce advance rates by 20.0%
25.0% or greater but less than 30.0%      An amount sufficient to reduce advance rates by 25.0%
For each additional 5.0% increase in      An amount sufficient to reduce advance rates by an
           Dilution                                      incremental 5.0%
</TABLE>

     "Dollars" or "$" means United States dollars.

     "Eligible Accounts" means those Accounts created by Borrower in the
ordinary course of its business, that arise out of Borrower's sale of goods or
rendition of services, that comply with each of the representations and
warranties respecting Eligible Accounts made in the Loan Documents, and that are
not excluded as ineligible by virtue of one or more of the excluding criteria
set forth below; provided, however, that such criteria may be revised from time
to time by Bank in Bank's discretion to address the results of any audit
performed by Bank from time to time after the Closing Date. In determining the
amount to be included, Eligible Accounts shall be calculated net of customer
deposits and unapplied cash and shall not give effect to any credits reflected
on Borrower's agings that would otherwise reduce the amount of ineligible
Accounts. Eligible Accounts shall not include the following:

          (a)  (i) with respect to Accounts due on or before the date that is 30
     days after the original invoice date thereof, Accounts that the Account
     Debtor has failed to pay within 90 days of the original invoice date
     therefor or within 60 days of the due date thereof, or

               (ii) with respect to Accounts due on or after the date that is 31
     days after the original invoice date thereof, Accounts that the Account
     Debtor has failed to pay within 120 days of the original invoice date
     therefor or within 30 days of the due date thereof; provided, however, that
     no Accounts shall constitute Eligible Accounts hereunder if such Accounts
     are outstanding (or provide terms of payment) more than 180 days after the
     original invoice thereof,

          (b)  Accounts owed by an Account Debtor (or its Affiliates) where 20%
     or more of all Accounts owed by that Account Debtor (or its Affiliates) are
     deemed ineligible under clause (a) above,

          (c)  Accounts with respect to which the Account Debtor is an Affiliate
     of Borrower or an employee or agent of Borrower or any Affiliate of
     Borrower,

                                                                               5
<PAGE>

          (d)  Accounts arising in a transaction wherein goods are placed on
     consignment or are sold pursuant to a guaranteed sale, a sale or return, a
     sale on approval, a bill and hold, a cash on delivery or any other terms by
     reason of which the payment by the Account Debtor may be conditional,

          (e)  Accounts that are not payable in Dollars,

          (f)  Accounts with respect to which the Account Debtor either (i) does
     not maintain its chief executive office in the United States, or (ii) is
     not organized under the laws of the United States or any state thereof, or
     (iii) is the government of any foreign country or sovereign state, or of
     any state, province, municipality, or other political subdivision thereof,
     or of any department, agency, public corporation, or other instrumentality
     thereof, unless (y) the Account is supported by an irrevocable letter of
     credit satisfactory to Bank (as to form, substance, and issuer or domestic
     confirming bank) that has been delivered to Bank and is directly drawable
     by Bank, or (z) the Account is covered by credit insurance in form,
     substance, and amount, and by an insurer, satisfactory to Bank,

          (g)  Accounts with respect to which the Account Debtor is either the
     United States or any department, agency, or instrumentality of the United
     States (exclusive, however, of Accounts with respect to which Borrower has
     complied, to the reasonable satisfaction of Bank, with the Assignment of
     Claims Act, 31 USC Section 3727),

          (h)  Accounts with respect to which the Account Debtor is a creditor
     of Borrower, has or has asserted a right of setoff, has disputed its
     obligation to pay all or any portion of the Account, or is the subject of
     litigation (including any collection actions) undertaken by Borrower,

          (i)  Accounts with respect to an Account Debtor whose total
     obligations owing to Borrower exceed 20% (such percentage as applied to a
     particular Account Debtor being subject to reduction by Bank in its
     discretion if the creditworthiness of such Account Debtor deteriorates) of
     all Eligible Accounts, to the extent of the obligations owing by such
     Account Debtor in excess of such percentage; provided, however, that, in
     each case, the amount of Eligible Accounts that are excluded because they
     exceed the foregoing percentage shall be determined by Bank based on all of
     the otherwise Eligible Accounts prior to giving effect to any eliminations
     based upon the foregoing concentration limit,

          (j)  Accounts with respect to which the Account Debtor is subject to
     an Insolvency Proceeding, is not Solvent, has gone out of business, or as
     to which Borrower has received notice of an imminent Insolvency Proceeding
     or a material impairment of the financial condition of such Account Debtor
     or as to which Borrower has referred the Account Debtor to Borrower's legal
     or collection department (or a third Person providing such services),

          (k)  Accounts with respect to which the Account Debtor is located in a
     state or jurisdiction (e.g., New Jersey, Minnesota, and West Virginia) that
     requires, as a condition

                                                                               6
<PAGE>

     to access to the courts of such jurisdiction, that a creditor qualify to
     transact business, file a business activities report or other report or
     form, or take one or more other actions, unless Borrower has so qualified,
     filed such reports or forms, or taken such actions (and, in each case, paid
     any required fees or other charges), except to the extent that Borrower may
     qualify subsequently as a foreign entity authorized to transact business in
     such state or jurisdiction and gain access to such courts, without
     incurring any cost or penalty viewed by Bank to be significant in amount,
     and such later qualification cures any access to such courts to enforce
     payment of such Account,

          (l)  Accounts, the collection of which, Bank, in its discretion,
     believes to be doubtful by reason of the Account Debtor's financial
     condition,

          (m)  Accounts that are not subject to a valid and perfected first
     priority Lien in favor of Bank,

          (n)  Accounts with respect to which (i) the goods giving rise to such
     Account have not been shipped and billed to the Account Debtor, or (ii) the
     services giving rise to such Account have not been performed and billed to
     the Account Debtor,

          (o)  Accounts that represent the right to receive progress payments or
     other advance billings that are due prior to the completion of performance
     by Borrower of the subject contract for goods or services, or

          (p)  Accounts representing service, finance, late or collection
     charges, to the extent of such service, finance, late or collection
     charges.

     "Eligible ATS Inventory" means Inventory that qualifies as Eligible
Finished Goods Inventory except for the fact that such Inventory constitutes
"assemble-to-ship" ("ATS") Inventory.

     "Eligible Finished Goods Inventory" means Inventory consisting of first
quality finished goods held for sale in the ordinary course of Borrower's
business that complies with each of the representations and warranties
respecting Eligible Finished Goods Inventory made in the Loan Documents, and
that is not excluded as ineligible by virtue of the one or more of the excluding
criteria set forth below; provided, however, that such criteria may be revised
from time to time by Bank in Bank's discretion to address the results of any
audit or appraisal performed by Bank from time to time after the Closing Date.
In determining the amount to be so included, Inventory shall be valued at the
lower of cost or market on a basis consistent with Borrower's historical
accounting practices. An item of Inventory shall not be included in Eligible
Inventory if:

          (a)  Borrower does not have good, valid, and marketable title thereto,

          (b)  it is not located at one of the locations in the continental
     United States set forth on Schedule E-1 or in transit from one such
     location to another such location,

          (c)  it is located on real property leased by Borrower or in a
     contract warehouse, in each case, unless it is subject to a Collateral
     Access Agreement (except if the leased real property is Borrower's facility
     located at 2027 Harpers Way, Torrance,

                                                                               7
<PAGE>

     California, in which case no Collateral Access Agreement shall be required)
     executed by the lessor or warehouseman, as the case may be, and unless it
     is segregated or otherwise separately identifiable from goods of others, if
     any, stored on the premises,

          (d)  it is not subject to a valid and perfected first priority Lien in
     favor of the Bank,

          (e)  it consists of goods returned or rejected by Borrower's customers
     or

          (f)  it consists of goods that are obsolete or slow moving,
     restrictive or custom items, work-in-process, raw materials, or goods that
     constitute spare parts, packaging and shipping materials, supplies used or
     consumed in Borrower's business, bill and hold goods, defective or damaged
     goods, "seconds," or Inventory sold or acquired on consignment, or

          (g)  it contains or bears any intellectual property rights licensed to
     Borrower or any Subsidiary, unless Bank is reasonably satisfied that it may
     sell or otherwise dispose of such Inventory without (i) infringing the
     rights of such licensor, (ii) violating any contract with such licensor, or
     (iii) incurring any liability with respect to payment of royalties other
     than royalties incurred pursuant to sale of such Inventory under the
     current licensing agreement.

     "Eligible Inventory" means Eligible ATS Inventory, Eligible Finished Goods
Inventory or Eligible Raw Material Inventory.

     "Eligible Raw Material Inventory" means Inventory that qualifies as
Eligible Finished Goods Inventory except for the fact that such Inventory
constitutes raw materials.

     "Equipment" means equipment (as that term is defined in the Code) and
includes machinery, machine tools, motors, furniture, furnishings, fixtures,
vehicles (including motor vehicles), computer hardware, tools, parts, and goods
(other than consumer goods, farm products, or Inventory), wherever located,
including all attachments, accessories, accessions, replacements, substitutions,
additions, and improvements to any of the foregoing.

     "Event of Default" has the meaning set forth in Section 6.1.

     "GAAP" means generally accepted accounting principles as in effect from
time to time in the United States, consistently applied.

     "Governing Documents" means, with respect to any Person, the certificate of
formation, articles of incorporation, by-laws, operating agreement, limited
partnership agreement, partnership agreement, joint venture agreement or other
organizational documents of such Person.

     "Governmental Authority" means any federal, state, local, or other
governmental or administrative body, instrumentality, department, or agency or
any court, tribunal, administrative hearing body, arbitration panel, commission,
or other similar dispute-resolving panel or body.

                                                                               8
<PAGE>

     "Guarantied Obligations" means, at any date, all guaranties or similar
contingent obligations of Borrower and its Subsidiaries as of such date. The
amount of any guaranty shall be deemed to be the lower of (x) an amount equal to
the stated or determinable amount of the primary obligation in respect of which
such guaranty is made and (y) the maximum amount for which Borrower or its
Subsidiary may be liable pursuant to the terms of the instrument embodying such
guarantee, unless such primary obligation and the maximum amount for which
Borrower or such Subsidiary may be liable are not stated or determinable, in
which case the amount of such guaranty shall be Borrower's or such Subsidiary's
maximum reasonably anticipated liability in respect thereof as determined by
Borrower in good faith.

     "Guarantor" means each of Virco Inc., a Delaware corporation, Virco Mgmt.
Corporation, a Delaware corporation, and any other Person that at any time
executes a Guaranty or any other guaranty in favor of Bank with respect to the
Obligations or whose assets, directly or indirectly, are at any time pledged as
security for the Obligations.

     "Guaranty" means each guaranty, executed and delivered by each Guarantor in
favor of Bank, in form and substance satisfactory to Bank, as the same may be
amended, restated, supplemented or otherwise modified from time to time.

     "Hedge Agreement" means any and all agreements or documents now existing or
hereafter entered into by Borrower or its Subsidiaries that provide for an
interest rate, credit, commodity or equity swap, cap, floor, collar, forward
foreign exchange transaction, currency swap, cross currency rate swap, currency
option, or any combination of, or option with respect to, these or similar
transactions, for the purpose of hedging Borrower's or its Subsidiaries'
exposure to fluctuations in interest or exchange rates, loan, credit exchange,
security or currency valuations or commodity prices.

     "Indebtedness" means (a) all obligations for borrowed money, (b) all
obligations evidenced by bonds, debentures, notes, or other similar instruments
and all reimbursement or other obligations in respect of letters of credit,
bankers acceptances, interest rate swaps, or other financial products, (c) all
obligations as a lessee under Capital Leases, (d) all obligations or liabilities
of others secured by a Lien on any asset of a Person or its Subsidiaries,
irrespective of whether such obligation or liability is assumed, (e) all
obligations to pay the deferred purchase price of assets (other than trade
payables incurred in the ordinary course of business and repayable in accordance
with customary trade practices), (f) all obligations owing under Hedge
Agreements and (g) any obligation guaranteeing or intended to guarantee (whether
directly or indirectly guaranteed, endorsed, co-made, discounted, or sold with
recourse) any obligation of any other Person that constitutes Indebtedness under
any of clauses (a) through (f) above.

     "Insolvency Proceeding" means any proceeding commenced by or against any
Person under any provision of the Bankruptcy Code or under any other state or
federal bankruptcy or insolvency law, assignments for the benefit of creditors,
formal or informal moratoria, compositions, extensions generally with creditors,
receivership, or proceedings seeking reorganization, arrangement, or other
similar relief.

                                                                               9
<PAGE>

     "Interest Expense" means, with reference to any period, the aggregate of
the interest expense of Borrower and its Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP.

     "Inventory" means inventory (as that term is defined in the Code).

     "Investment" means, with respect to any Person, any investment by such
Person in any other Person (including Affiliates) in the form of loans,
guarantees, advances, or capital contributions (excluding (a) commission,
travel, and similar advances to officers and employees of such Person made in
the ordinary course of business, and (b) bona fide Accounts arising in the
ordinary course of business consistent with past practices), purchases or other
acquisitions of Indebtedness, stock, or all or substantially all of the assets
of such other Person (or of any division or business line of such other Person),
and any other items that are or would be classified as investments on a balance
sheet prepared in accordance with GAAP.

     "Investment Property" means investment property (as that term is defined in
the Code), and any and all supporting obligations in respect thereof.

     "IRB Indebtedness" means Indebtedness of Borrower issued and outstanding
under the Loan Agreement dated as of December 1, 1994, among the Industrial
Development Authority of the City of Torrance, U.S. Trust Company of California,
N.A., as Trustee, and Borrower, as in effect on the Closing Date.

     "LC Usage Amount" means, at any time, the sum of (a) the aggregate
outstanding principal amount of Advances on such date plus (b) the Letter of
Credit Usage on such date.

     "Letter of Credit Usage" means, at any date, the aggregate undrawn amount
of all outstanding Letters of Credit on such date.

     "Leverage Ratio" means, at any date, the ratio of (a) Total Funded Debt at
such date to (b) Adjusted Consolidated EBITDA for the four consecutive fiscal
quarters ended on or most recently to such date.

     "Lien" means any interest in an asset securing an obligation owed to, or a
claim by, any Person other than the owner of the asset, irrespective of whether
(a) such interest is based on the common law, statute, or contract, (b) such
interest is recorded or perfected, and (c) such interest is contingent upon the
occurrence of some future event or events or the existence of some future
circumstance or circumstances. Without limiting the generality of the foregoing,
the term "Lien" includes the lien or security interest arising from a mortgage,
deed of trust, encumbrance, pledge, hypothecation, assignment, deposit
arrangement, security agreement, conditional sale or trust receipt, or from a
lease, consignment, or bailment for security purposes and also includes
reservations, exceptions, encroachments, easements, rights-of-way, covenants,
conditions, restrictions, leases, and other title exceptions and encumbrances
affecting Real Property.

     "Line of Credit Period" means the period from and including the Closing
Date to but not including the Line of Credit Termination Date.

     "Line of Credit Termination Date" means August 1, 2005.

                                                                              10
<PAGE>

     "Loan Disbursement Order" means an instructional letter executed and
delivered by Borrower to Bank regarding the extensions of credit to be made on
the Closing Date, the form and substance of which is satisfactory to Bank.

     "Loan Documents" means this Agreement, the Bank Product Agreements, the
Guaranties, the Security Agreements, any note or notes executed by Borrower in
connection with this Agreement and payable to Bank, and any other agreement
entered into, now or in the future, by Borrower, any Guarantor or any of their
respective Affiliates and Bank in connection with this Agreement or any of the
foregoing agreements.

     "Material Adverse Change" means (a) a material adverse change in the
business, prospects, operations, results of operations, assets, liabilities or
condition (financial or otherwise) of Borrower and its Subsidiaries, taken as a
whole, (b) a material impairment of Borrower's and its Subsidiaries' ability to
perform their obligations under the Loan Documents to which they are parties or
of Bank's ability to enforce the Obligations or realize upon the Collateral, or
(c) a material impairment of the enforceability or priority of the Bank's Liens
with respect to the Collateral as a result of an action or failure to act on the
part of Borrower or its Subsidiaries.

     "Maximum Inventory Amount" means, at any date, an amount equal to (a) if
such date is on or after March 1 and on or before July 31, $25,000,000 and (b)
at all other times, $15,000,000.

     "Maximum Line of Credit Amount" means $45,000,000.

     "Mortgages" means, individually and collectively, one or more mortgages,
deeds of trust, or deeds to secure debt, executed and delivered by Borrower or
its Subsidiaries in favor of Bank, in form and substance satisfactory to Bank,
that encumber the Real Property Collateral and the related improvements thereto.

     "Mortgage Related Documents" means, with respect to each parcel composing
the Real Property Collateral, each of the following, in each case in form, scope
and substance satisfactory to Bank:

          (a)  marked-up commitments for a policy of title insurance, insuring
     the first priority of Bank's Liens, with title insurance companies (the
     "Title Companies") acceptable to Bank on each of parcel subject to a
     Mortgage, with the final title insurance policy being delivered within
     thirty (30) days of the Closing Date;

          (b)  any customary affidavits and indemnities in favor of the Title
     Companies as may be required or necessary to obtain title insurance
     satisfactory to Bank;

          (c)  copies of all recorded documents creating exceptions to the title
     policy referred to in Paragraph (a) above;

          (d)  a survey; and, the surveyors retained for such survey shall be
     acceptable to Bank;

                                                                              11
<PAGE>

          (e)  environmental assessments, audits or reports as Bank may request;
     and, the environmental consultants retained for such assessments, audits or
     reports shall be acceptable to Bank;

          (f)  evidence of property and liability insurance on such parcel in
     form and substance acceptable to Bank naming Bank as first mortgagee; and

          (g)  such other certificates, documents and information as are
     reasonably requested by Bank, including, without limitation, permanent
     certificates of occupancy and evidence of zoning.

     "Net Income" means, with reference to any period, the net income (or net
loss) of Borrower and its Subsidiaries for such period computed on a
consolidated basis in accordance with GAAP; provided that there shall be
excluded from Net Income (a) the net income (or net loss) of any Person accrued
prior to the date it becomes a Subsidiary of, or has merged into or consolidated
with, Borrower or any of its Subsidiaries; and (b) the net income (or net loss)
of any Person (other than a Guarantor) in which Borrower or any of its
Subsidiaries has a equity interest in, except to the extent of the amount of
dividends or other distributions actually received by Borrower or such Guarantor
during such period.

     "Obligations" means (a) all loans (including the Term Loan), Advances,
debts, principal, interest (including any interest that, but for the
commencement of an Insolvency Proceeding, would have accrued), contingent
reimbursement obligations with respect to outstanding Letters of Credit,
premiums, liabilities, obligations (including indemnification obligations),
fees, charges, costs, expenses, lease payments, guaranties, covenants, and
duties of any kind and description owing by Borrower or a Guarantor to Bank
pursuant to or evidenced by the Loan Documents and irrespective of whether for
the payment of money, whether direct or indirect, absolute or contingent, due or
to become due, now existing or hereafter arising, and including all interest not
paid when due, and (b) all Bank Product Obligations. Any reference in this
Agreement or in the Loan Documents to the Obligations shall include all
extensions, modifications, renewals or alterations thereof, both prior and
subsequent to any Insolvency Proceeding.

     "Permitted Liens" has the meaning set forth in Section 5.5.

     "Person" means natural persons, corporations, limited liability companies,
limited partnerships, general partnerships, limited liability partnerships,
joint ventures, trusts, land trusts, business trusts, or other organizations,
irrespective of whether they are legal entities, and governments and agencies
and political subdivisions thereof.

     "Real Property" means any estates or interests in real property now owned
or hereafter acquired by Borrower or its Subsidiaries and the improvements
thereto.

     "Real Property Collateral" means the parcel or parcels of Real Property
identified on Schedule R-1 and any Real Property hereafter acquired by Borrower
or its Subsidiaries.

                                                                              12
<PAGE>

     "Security Agreement" means the security agreement among Borrower,
Guarantors and Bank, in form and substance satisfactory to Bank, as amended,
restated, supplemented or otherwise modified from time to time.

     "Solvent" means, with respect to any Person on a particular date, that, at
fair valuations, the sum of such Person's assets is greater than all of such
Person's debts.

     "Subsidiary" of a Person means a corporation, partnership, limited
partnership, limited liability company, or other entity in which that Person
directly or indirectly owns or controls the shares of Stock having ordinary
voting power to elect a majority of the board of directors (or appoint other
comparable managers) of such corporation, partnership, limited liability
company, or other entity. Unless otherwise qualified, all references to a
"Subsidiary" or to "Subsidiaries" in this Agreement and the other Loan Documents
shall refer to a Subsidiary or Subsidiaries of Borrower.

     "Tangible Net Worth" means, at any date, the result of (a) Borrower's total
stockholders' equity plus (b) subordinated Indebtedness of Borrower and its
Subsidiaries minus (c) any intangible assets of Borrower and its Subsidiaries.

     "Term Loan" has the meaning set forth in Section 1.1(d).

     "Term Loan Termination Date" means January 31, 2007.

     "Term Note" has the meaning set forth in Section 1.1(d).

     "Total Funded Debt" means, at any date, the sum of (a) Indebtedness and all
other interest bearing liabilities of Borrower and its Subsidiaries plus (b) all
Guarantied Obligations of Borrower and its Subsidiaries, in each case
outstanding as of such date.

     "Total Liabilities" means, at any date, the sum of (a) Indebtedness and all
other liabilities of Borrower and its Subsidiaries plus (b) all Guarantied
Obligations of Borrower and its Subsidiaries, in each case outstanding as of
such date.

     Accounting Terms and Determinations. Unless otherwise specified herein, all
accounting terms used herein shall be interpreted and all accounting
determinations hereunder shall be made in accordance with GAAP. All financial
statements required to be delivered hereunder shall be prepared in accordance
with GAAP as in effect from time to time, applied on a basis consistent (except
for changes concurred in by the Borrower's independent public accountants) with
the most recent audited consolidated financial statements of the Borrower and
its Subsidiaries delivered to the Lender.

     Other Definitional Provisions. References in this Agreement to "Articles",
"Sections", "Schedules" or "Exhibits" shall be to Articles, Sections, Schedules
or Exhibits of or to this Agreement unless otherwise specifically provided. Any
of the terms defined in Annex A may, unless the context otherwise requires, be
used in the singular or plural depending on the reference. "Include" or
"includes" and "including" shall be deemed to be followed by "without
limitation" whether or not they are in fact followed by such words or words of
like import. "Writing", "written" and comparable terms refer to printing, typing
and other means of

                                                                              13
<PAGE>

reproducing words in a visible form. References to any agreement or contract are
to such agreement or contract as amended, modified or supplemented from time to
time in accordance with the terms hereof and thereof. References to any Person
include the successors and assigns of such Person. References "from" or
"through" any date mean, unless otherwise specified, "from and including" or
"through and including", respectively.

                                                                              14
<PAGE>

                                                                     EXHIBIT A-1

                                     FORM OF

                          REVOLVING LINE OF CREDIT NOTE

$45,000,000                                              West Covina, California
                                                                January 27, 2004

     FOR VALUE RECEIVED, the undersigned VIRCO MFG. CORPORATION ("Borrower")
promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank")
at its office at San Gabriel Valley Regional Commercial Banking Office, 1000
Lakes Drive, Suite 250, West Covina, California, or at such other place as the
holder hereof may designate, in lawful money of the United States of America and
in immediately available funds, the principal sum of Forty Five Million Dollars
($45,000,000), or so much thereof as may be advanced and be outstanding, with
interest thereon, to be computed on each advance from the date of its
disbursement as set forth herein.

     This Revolving Line of Credit Note (this "Note") is the Line of Credit Note
issued pursuant to the Credit Agreement dated as of January 27, 2004 (as
amended, restated, supplemented or otherwise modified, the "Credit Agreement")
between Borrower and Bank. Terms defined in the Credit Agreement and not
otherwise defined herein are used herein as therein defined. Reference hereby is
made to the Loan Documents for a description of the assets in which a Lien has
been granted, the nature and extent of the security and the guaranties, the
terms and conditions upon which the Liens and each guaranty were granted and the
rights of the holder of this Note in respect thereof.

     DEFINITIONS:

     As used herein, the following terms shall have the meanings set forth after
each, and any other term defined in this Note shall have the meaning set forth
at the place defined:

     (a)  "Fixed Rate Term" means a period commencing on a Business Day and
continuing for one (1), two (2), three (3), six (6), nine (9) or twelve (12)
months, as designated by Borrower, during which all or a portion of the
outstanding principal balance of this Note bears interest determined in relation
to LIBOR; provided however, that no Fixed Rate Term may be selected for a
principal amount less than $1,000,000; and provided further, that no Fixed Rate
Term shall extend beyond the Line of Credit Termination Date. If any Fixed Rate
Term would end on a day which is not a Business Day, then such Fixed Rate Term
shall be extended to the next succeeding Business Day.

     (b)  "LIBOR" means the rate per annum (rounded upward, if necessary, to the
nearest whole 1/8 of 1%) and determined pursuant to the following formula:

           LIBOR =           Base LIBOR
                    -------------------------------
                    100% - LIBOR Reserve Percentage

                                                                               1
<PAGE>

          (i)  "Base LIBOR" means the rate per annum for United States dollar
     deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the
     understanding that such rate is quoted by Bank for the purpose of
     calculating effective rates of interest for loans making reference thereto,
     on the first day of a Fixed Rate Term for delivery of funds on said date
     for a period of time approximately equal to the number of days in such
     Fixed Rate Term and in an amount approximately equal to the principal
     amount to which such Fixed Rate Term applies. Borrower understands and
     agrees that Bank may base its quotation of the Inter-Bank Market Offered
     Rate upon such offers or other market indicators of the Inter-Bank Market
     as Bank in its discretion deems appropriate including, but not limited to,
     the rate offered for U.S. dollar deposits on the London Inter-Bank Market.

          (ii) "LIBOR Reserve Percentage" means the reserve percentage
     prescribed by the Board of Governors of the Federal Reserve System (or any
     successor) for "Eurocurrency Liabilities" (as defined in Regulation D of
     the Federal Reserve Board, as amended), adjusted by Bank for expected
     changes in such reserve percentage during the applicable Fixed Rate Term.

     (c)  "Prime Rate" means at any time the rate of interest most recently
announced within Bank at its principal office as its Prime Rate, with the
understanding that the Prime Rate is one of Bank's base rates and serves as the
basis upon which effective rates of interest are calculated for those loans
making reference thereto, and is evidenced by the recording thereof after its
announcement in such internal publication or publications as Bank may designate.

INTEREST:

     (a)  Interest. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 360-day year, actual days elapsed) either
(i) at a fluctuating rate per annum equal to the Prime Rate in effect from time
to time plus 0.50% or (ii) at a fixed rate per annum determined by Bank equal to
LIBOR in effect on the first day of the applicable Fixed Rate Term plus 2.75%.
When interest is determined in relation to the Prime Rate, each change in the
rate of interest hereunder shall become effective on the date each Prime Rate
change is announced within Bank. With respect to each LIBOR selection hereunder,
Bank is hereby authorized to note the date, principal amount, interest rate and
Fixed Rate Term applicable thereto and any payments made thereon on Bank's books
and records (either manually or by electronic entry) and/or on any schedule
attached to this Note, which notations shall be prima facie evidence of the
accuracy of the information noted.

     (b)  Selection of Interest Rate Options. At any time any portion of this
Note bears interest determined in relation to LIBOR, it may be continued by
Borrower at the end of the Fixed Rate Term applicable thereto so that all or a
portion thereof bears interest determined in relation to the Prime Rate or to
LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion
of this Note bears interest determined in relation to the Prime Rate, Borrower
may convert all or a portion thereof so that it bears interest determined in
relation to LIBOR for a Fixed Rate Term designated by Borrower. At such time as
Borrower requests an advance hereunder or wishes to select a LIBOR option for
all or a portion of the outstanding principal balance hereof, and at the end of
each Fixed Rate Term, Borrower shall give Bank

                                                                               2
<PAGE>

notice specifying: (i) the interest rate option selected by Borrower; (ii) the
principal amount subject thereto; and (iii) for each LIBOR selection, the length
of the applicable Fixed Rate Term; provided, however, that if an Event of
Default has occurred and is continuing, Borrower may not elect to continue or
convert any Advance outstanding hereunder into a LIBOR rate loan. Any such
notice may be given by telephone (or such other electronic method as Bank may
permit) so long as, with respect to each LIBOR selection, (A) if requested by
Bank, Borrower provides to Bank written confirmation thereof not later than
three (3) Business Days after such notice is given, and (B) such notice is given
to Bank prior to 10:00 a.m. on the first day of the Fixed Rate Term, or at a
later time during any Business Day if Bank, at it's sole option but without
obligation to do so, accepts Borrower's notice and quotes a fixed rate to
Borrower. If Borrower does not immediately accept a fixed rate when quoted by
Bank, the quoted rate shall expire and any subsequent LIBOR request from
Borrower shall be subject to a redetermination by Bank of the applicable fixed
rate. If no specific designation of interest is made at the time any advance is
requested hereunder or at the end of any Fixed Rate Term, Borrower shall be
deemed to have made a Prime Rate interest selection for such advance or the
principal amount to which such Fixed Rate Term applied.

     (c)  Taxes and Regulatory Costs. Borrower shall pay to Bank immediately
upon demand, in addition to any other amounts due or to become due hereunder,
any and all (i) withholdings, interest equalization taxes, stamp taxes or other
taxes (except income and franchise taxes) imposed by any Governmental Authority
and related in any manner to LIBOR, and (ii) future, supplemental, emergency or
other changes in the LIBOR Reserve Percentage, assessment rates imposed by the
Federal Deposit Insurance Corporation, or similar requirements or costs imposed
by any Governmental Authority or resulting from compliance by Bank with any
request or directive (whether or not having the force of law) from any central
bank or other Governmental Authority and related in any manner to LIBOR to the
extent they are not included in the calculation of LIBOR. In determining which
of the foregoing are attributable to any LIBOR option available to Borrower
hereunder, any reasonable allocation made by Bank among its operations shall be
conclusive and binding upon Borrower.

     (d)  Payment of Interest. Interest accrued on this Note shall be payable on
the first day of each month, commencing February 1, 2004.

     (e)  Default Interest. From and after the maturity date of this Note, or
such earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on the
basis of a 360-day year, actual days elapsed) equal to four percent (4%) above
the rate of interest from time to time applicable to this Note.

BORROWING AND REPAYMENT:

     (a)  Borrowing and Repayment. Borrower may from time to time during the
term of this Note borrow, partially or wholly repay its outstanding borrowings,
and reborrow, subject to all of the limitations, terms and conditions of this
Note and of any document executed in connection with or governing this Note;
provided however, that the total outstanding borrowings under this Note shall
not at any time exceed the principal amount set forth above or such lesser
amount as shall at any time be available hereunder, as set forth in the Credit
Agreement. The

                                                                               3
<PAGE>

unpaid principal balance of this obligation at any time shall be the total
amounts advanced hereunder by the holder hereof less the amount of principal
payments made hereon by or for any Borrower, which balance may be endorsed
hereon from time to time by the holder. The outstanding principal balance of
this Note shall be due and payable in full on Line of Credit Termination Date.

     (b)  Advances. Advances hereunder, to the total amount of the principal sum
stated above, may be made by the holder at the oral or written request of (i)
Robert A. Virtue, Robert Dose, Doug Virtue or Bassey Yau, any one of them acting
alone, who are authorized to request Advances and direct the disposition of any
Advances until written notice of the revocation of such authority is received by
the holder at the office designated above, or (ii) any person, with respect to
Advances deposited to the credit of any deposit account of Borrower, which
advances, when so deposited, shall be conclusively presumed to have been made to
or for the benefit of Borrower regardless of the fact that persons other than
those authorized to request Advances may have authority to draw against such
account. The holder shall have no obligation to determine whether any person
requesting an Advance is or has been authorized by Borrower.

     (c)  Application of Payments. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be applied
first, to the outstanding principal balance of this Note which bears interest
determined in relation to the Prime Rate, if any, and second, to the outstanding
principal balance of this Note which bears interest determined in relation to
LIBOR, with such payments applied to the oldest Fixed Rate Term first.

PREPAYMENT:

     (a)  Prime Rate. Borrower may prepay principal on any portion of this Note
which bears interest determined in relation to the Prime Rate at any time, in
any amount and without penalty.

     (b)  LIBOR. Borrower may prepay principal on any portion of this Note which
bears interest determined in relation to LIBOR at any time and in the minimum
amount of $1,000,000; provided, however, that if the outstanding principal
balance of such portion of this Note is less than said amount, the minimum
prepayment amount shall be the entire outstanding principal balance thereof. In
consideration of Bank providing this prepayment option to Borrower, or if any
such portion of this Note shall become due and payable at any time prior to the
last day of the Fixed Rate Term applicable thereto by acceleration or otherwise,
Borrower shall pay to Bank immediately upon demand a fee which is the sum of the
discounted monthly differences for each month from the month of prepayment
through the month in which such Fixed Rate Term matures, calculated as follows
for each such month:

          (i)  Determine the amount of interest which would have accrued each
     month on the amount prepaid at the interest rate applicable to such amount
     had it remained outstanding until the last day of the Fixed Rate Term
     applicable thereto.

          (ii) Subtract from the amount determined in (i) above the amount of
     interest which would have accrued for the same month on the amount prepaid
     for the remaining

                                                                               4
<PAGE>

     term of such Fixed Rate Term at LIBOR in effect on the date of prepayment
     for new loans made for such term and in a principal amount equal to the
     amount prepaid.

          (iii) If the result obtained in (ii) for any month is greater than
     zero, discount that difference by LIBOR used in (ii) above.

     Borrower acknowledges that prepayment of such amount may result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Borrower, therefore, agrees to pay the above described prepayment
fee and agrees that said amount represents a reasonable estimate of the
prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay
any prepayment fee when due, the amount of such prepayment fee shall thereafter
bear interest until paid at a rate per annum two percent (2%) above the Prime
Rate in effect from time to time (computed on the basis of a 360 day year,
actual days elapsed). Each change in the rate of interest on any such past due
prepayment fee shall become effective on the date each Prime Rate change is
announced within Bank.

     (c)  The principal Indebtedness evidenced hereby shall be payable as
follows and without set off, counterclaim or reduction of any kind:

          (i)  the amount, if any, by which the LC Usage Amount at any time
     exceeds the lesser of the Revolving Commitment or the Borrowing Base at
     such date shall be payable immediately; and

          (ii) the principal Indebtedness evidenced hereby shall be payable on
     the Line of Credit Termination Date

EVENTS OF DEFAULT:

     Any default in the payment or performance of any obligation under this
Note, or any defined event of default under the Credit Agreement, shall
constitute an "Event of Default" under this Note.

MISCELLANEOUS:

     (a)  Obligations Joint and Several. Should more than one person or entity
sign this Note as a Borrower, the obligations of each such Borrower shall be
joint and several.

     (b)  Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of California.

                            [Signature Page Follows]

                                                                               5
<PAGE>

     IN WITNESS WHEREOF, the undersigned has executed this Note as of the date
first written above.

                                                     VIRCO MFG. CORPORATION

                                                     By: _______________________

                                                     Title: ____________________

                                                                               6
<PAGE>

                                                                     EXHIBIT A-2

                                     FORM OF

                                    TERM NOTE

$12,500,000                                              West Covina, California
                                                                January 27, 2004

     FOR VALUE RECEIVED, the undersigned VIRCO MFG. CORPORATION ("Borrower")
promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank")
at its office at San Gabriel Valley Regional Commercial Banking Office, 1000
Lakes Drive, Suite 250, West Covina, California, or at such other place as the
holder hereof may designate, in lawful money of the United States of America and
in immediately available funds, the principal sum of $12,500,000, with interest
thereon as set forth herein.

     This Term Note (this "Note") is the Term Note issued pursuant to the Credit
Agreement dated as of January 27, 2004 (as amended, restated, supplemented or
otherwise modified, the "Credit Agreement") between Borrower and Bank. Terms
defined in the Credit Agreement and not otherwise defined herein are used herein
as therein defined. Reference hereby is made to the Loan Documents for a
description of the assets in which a Lien has been granted, the nature and
extent of the security and the guaranties, the terms and conditions upon which
the Liens and each guaranty were granted and the rights of the holder of this
Note in respect thereof.

DEFINITIONS:

     As used herein, the following terms shall have the meanings set forth after
each, and any other term defined in this Note shall have the meaning set forth
at the place defined:

     (a)  "Fixed Rate Term" means a period commencing on a Business Day and
continuing for one (1), two (2), three (3), six (6), nine (9) or twelve (12)
months, as designated by Borrower, during which all or a portion of the
outstanding principal balance of this Note bears interest determined in relation
to LIBOR; provided however, that no Fixed Rate Term may be selected for a
principal amount less than $1,000,000; and provided further, that no Fixed Rate
Term shall extend beyond the Term Loan Termination Date. If any Fixed Rate Term
would end on a day which is not a Business Day, then such Fixed Rate Term shall
be extended to the next succeeding Business Day.

     (b)  "LIBOR" means the rate per annum (rounded upward, if necessary, to the
nearest whole 1/8 of 1%) and determined pursuant to the following formula:

     LIBOR =           Base LIBOR
              -------------------------------
              100% - LIBOR Reserve Percentage

          (i)  "Base LIBOR" means the rate per annum for United States dollar
     deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the
     understanding that such

                                                                               1
<PAGE>

     rate is quoted by Bank for the purpose of calculating effective rates of
     interest for loans making reference thereto, on the first day of a Fixed
     Rate Term for delivery of funds on said date for a period of time
     approximately equal to the number of days in such Fixed Rate Term and in an
     amount approximately equal to the principal amount to which such Fixed Rate
     Term applies. Borrower understands and agrees that Bank may base its
     quotation of the Inter-Bank Market Offered Rate upon such offers or other
     market indicators of the Inter-Bank Market as Bank in its discretion deems
     appropriate including, but not limited to, the rate offered for U.S. dollar
     deposits on the London Inter-Bank Market.

          (ii) "LIBOR Reserve Percentage" means the reserve percentage
     prescribed by the Board of Governors of the Federal Reserve System (or any
     successor) for "Eurocurrency Liabilities" (as defined in Regulation D of
     the Federal Reserve Board, as amended), adjusted by Bank for expected
     changes in such reserve percentage during the applicable Fixed Rate Term.

     (c)  "Prime Rate" means at any time the rate of interest most recently
announced within Bank at its principal office as its Prime Rate, with the
understanding that the Prime Rate is one of Bank's base rates and serves as the
basis upon which effective rates of interest are calculated for those loans
making reference thereto, and is evidenced by the recording thereof after its
announcement in such internal publication or publications as Bank may designate.

INTEREST:

     (a)  Interest. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 360-day year, actual days elapsed) either
at a (i) fluctuating rate per annum equal to the Prime Rate in effect from time
to time plus 0.75%, or (ii) at a fixed rate per annum determined by Bank equal
to LIBOR in effect on the first day of the applicable Fixed Rate Term plus
3.25%. When interest is determined in relation to the Prime Rate, each change in
the rate of interest hereunder shall become effective on the date each Prime
Rate change is announced within Bank. With respect to each LIBOR selection
hereunder, Bank is hereby authorized to note the date, principal amount,
interest rate and Fixed Rate Term applicable thereto and any payments made
thereon on Bank's books and records (either manually or by electronic entry)
and/or on any schedule attached to this Note, which notations shall be prima
facie evidence of the accuracy of the information noted.

     (b)  Selection of Interest Rate Options. At any time any portion of this
Note bears interest determined in relation to LIBOR, it may be continued by
Borrower at the end the Fixed Rate Term applicable thereto so that all or a
portion thereof bears interest determined in relation to the Prime Rate or to
LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion
of this Note bears interest determined in relation to the Prime Rate, Borrower
may convert all or a portion thereof so that it bears interest determined in
relation to LIBOR for a Fixed Rate Term designated by Borrower. At the time this
Note is disbursed or Borrower wishes to select a LIBOR option for all or a
portion of the outstanding principal balance hereof, and at the end of each
Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the interest
rate option selected by Borrower; (ii) the principal amount subject thereto; and
(iii) for each LIBOR selection, the length of the applicable Fixed Rate Term;
provided, however, that if an

                                                                               2
<PAGE>

Event of Default has occurred and is continuing, Borrower may not elect to
continue or convert any portion of the Term Loan outstanding hereunder into a
LIBOR rate loan. Any such notice may be given by telephone (or such other
electronic method as Bank may permit) so long as, with respect to each LIBOR
selection, (A) if requested by Bank, Borrower provides to Bank written
confirmation thereof not later than three (3) Business Days after such notice is
given, and (B) such notice is given to Bank prior to 10:00 a.m. on the first day
of the Fixed Rate Term, or at a later time during any Business Day if Bank, at
it's sole option but without obligation to do so, accepts Borrower's notice and
quotes a fixed rate to Borrower. If Borrower does not immediately accept a fixed
rate when quoted by Bank, the quoted rate shall expire and any subsequent LIBOR
request from Borrower shall be subject to a redetermination by Bank of the
applicable fixed rate. If no specific designation of interest is made at the
time this Note is disbursed or at the end of any Fixed Rate Term, Borrower shall
be deemed to have made a Prime Rate interest selection for this Note or the
principal amount to which such Fixed Rate Term applied.

     (c)  Taxes and Regulatory Costs. Borrower shall pay to Bank immediately
upon demand, in addition to any other amounts due or to become due hereunder,
any and all (i) withholdings, interest equalization taxes, stamp taxes or other
taxes (except income and franchise taxes) imposed by any Governmental Authority
and related in any manner to LIBOR, and (ii) future, supplemental, emergency or
other changes in the LIBOR Reserve Percentage, assessment rates imposed by the
Federal Deposit Insurance Corporation, or similar requirements or costs imposed
by any Governmental Authority or resulting from compliance by Bank with any
request or directive (whether or not having the force of law) from any central
bank or other Governmental Authority and related in any manner to LIBOR to the
extent they are not included in the calculation of LIBOR. In determining which
of the foregoing are attributable to any LIBOR option available to Borrower
hereunder, any reasonable allocation made by Bank among its operations shall be
conclusive and binding upon Borrower.

     (d)  Payment of Interest. Interest accrued on this Note shall be payable on
the first day of each month, commencing February 1, 2004.

     (e)  Default Interest. From and after the maturity date of this Note, or
such earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on the
basis of a 360 day year, actual days elapsed) equal to four percent (4%) above
the rate of interest from time to time applicable to this Note.

REPAYMENT AND PREPAYMENT:

     (a)  Repayment. The Term Loan evidenced hereby shall be payable as follows
and without set off, counterclaim or reduction of any kind:

          (i)  an installment of principal equal to $520,833.34 shall be due and
     payable on each January 31, April 30, July 31 and October 31 of each year,
     commencing on April 30, 2004;

                                                                               3
<PAGE>

          (ii) on the date of the consummation of any disposition of any assets
     of Borrower or any of its Subsidiaries (other than a disposition permitted
     by Section 5.6 of the Credit Agreement), an amount of the cash proceeds
     received in connection such disposition equal to the excess, if any, of the
     aggregate cash proceeds received in connection with all dispositions of
     assets (other than those permitted by Section 5.6 of the Credit Agreement)
     less (A) any fees, costs, commissions and expenses reasonably incurred in
     connection with such dispositions and (B) the taxes actually paid or to be
     payable by Borrower (as estimated by the chief financial officer of
     Borrower, giving effect to the overall tax position of Borrower), over
     $500,000, shall be payable in respect of the Indebtedness evidenced hereby;
     such payment shall be applied in the inverse order of the maturities due
     hereunder (and, Borrower acknowledges that nothing contained in this
     subclause (ii) shall permit Borrower or any of its Subsidiaries to sell or
     otherwise dispose of any assets other than in accordance with Section 5.6
     of the Credit Agreement); and

          (iii) the principal Indebtedness evidenced hereby shall be payable on
     the Term Loan Termination Date.

     (b)  Application of Payments. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be applied
first, to the outstanding principal balance of this Note which bears interest
determined in relation to the Prime Rate, if any, and second, to the outstanding
principal balance of this Note which bears interest determined in relation to
LIBOR, with such payments applied to the oldest Fixed Rate Term first.

     (c)  Prepayment.

     Prime Rate. Borrower may prepay principal on any portion of this Note which
bears interest determined in relation to the Prime Rate at any time, in any
amount and without penalty. Any such prepayment shall be applied in the inverse
order of the maturities due hereunder.

     LIBOR. Borrower may prepay principal on any portion of this Note which
bears interest determined in relation to LIBOR at any time and in the minimum
amount of $1,000,000; provided however, that if the outstanding principal
balance of such portion of this Note is less than said amount, the minimum
prepayment amount shall be the entire outstanding principal balance thereof. In
consideration of Bank providing this prepayment option to Borrower, or if any
such portion of this Note shall become due and payable at any time prior to the
last day of the Fixed Rate Term applicable thereto by acceleration or otherwise,
Borrower shall pay to Bank immediately upon demand a fee which is the sum of the
discounted monthly differences for each month from the month of prepayment
through the month in which such Fixed Rate Term matures, calculated as follows
for each such month:

          (i)  Determine the amount of interest which would have accrued each
     month on the amount prepaid at the interest rate applicable to such amount
     had it remained outstanding until the last day of the Fixed Rate Term
     applicable thereto.

                                                                               4
<PAGE>

          (ii) Subtract from the amount determined in (i) above the amount of
     interest which would have accrued for the same month on the amount prepaid
     for the remaining term of such Fixed Rate Term at LIBOR in effect on the
     date of prepayment for new loans made for such term and in a principal
     amount equal to the amount prepaid.

          (iii) If the result obtained in (ii) for any month is greater than
     zero, discount that difference by LIBOR used in (ii) above.

     Borrower acknowledges that prepayment of such amount may result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Borrower, therefore, agrees to pay the above described prepayment
fee and agrees that said amount represents a reasonable estimate of the
prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay
any prepayment fee when due, the amount of such prepayment fee shall thereafter
bear interest until paid at a rate per annum two percent (2%) above the Prime
Rate in effect from time to time (computed on the basis of a 360 day year,
actual days elapsed). Each change in the rate of interest on any such past due
prepayment fee shall become effective on the date each Prime Rate change is
announced within Bank.

     All prepayments of principal shall be applied on the most remote principal
installment or installments then unpaid.

EVENTS OF DEFAULT:

     Any default in the payment or performance of any obligation under this
Note, or any defined Event of Default under the Credit Agreement, shall
constitute an "Event of Default" under this Note.

MISCELLANEOUS:

     (a)  Obligations Joint and Several. Should more than one person or entity
sign this Note as a Borrower, the obligations of each such Borrower shall be
joint and several.

     (b)  Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of California.

                            [Signature Page Follows]

                                                                               5
<PAGE>

     IN WITNESS WHEREOF, the undersigned has executed this Note as of the date
first written above.
                                                          VIRCO MFG. CORPORATION

                                                          By: /s/ Robert E. Dose
                                                             -------------------

                                                          Title: VP Finance

                                                                               6
<PAGE>

                                                                       EXHIBIT B

                                     FORM OF

                           BORROWING BASE CERTIFICATE

<PAGE>

                                                                       EXHIBIT C

                                     FORM OF

                             COMPLIANCE CERTIFICATE

<PAGE>

                                  SCHEDULE 2.11

                              ENVIRONMENTAL MATTERS

                                      None

<PAGE>

                                  SCHEDULE E-1

                          EQUIPMENT/INVENTORY LOCATIONS

2027 Harpers Way
Torrance, CA  90501

1701 Sturgis Road
Conway, AR  72034

900 Robins Street
Conway, AR 72034

250 Harkrider Street
Conway, AR 72032

<PAGE>

                                  SCHEDULE R-1

                            REAL PROPERTY COLLATERAL

1.   1701 Sturgis Road, Conway Plant, Arkansas; 1,200,000 sq. ft.

2.   900 Robbins Street, Conway Plant, Arkansas; 375,000 sq. ft.

3.   701 Bruce Street, Conway Plant, Arkansas; 150,000 sq. ft.

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.3
<SEQUENCE>5
<FILENAME>v96066exv99w3.txt
<DESCRIPTION>EXHIBIT 99.3
<TEXT>
<PAGE>

                                                                  EXECUTION COPY

EXHIBIT 99.3

                               SUBSIDIARY GUARANTY

     SUBSIDIARY GUARANTY ("SUBSIDIARY GUARANTY") dated as of January 27, 2004
made by Virco Mgmt. Corporation, a Delaware corporation and a subsidiary of the
below referenced Borrower (the "GUARANTOR"), in favor of Wells Fargo Bank,
National Association (the "BANK"), the lender under the Credit Agreement dated
as of even date herewith (as the same may be amended, restated, modified or
supplemented from time to time, the "CREDIT AGREEMENT") between Virco Mfg.
Corporation, a Delaware corporation (the "BORROWER"), and the Bank.

                                    RECITALS

     WHEREAS, pursuant to the Credit Agreement, the Bank has agreed to make
certain loans and extend certain other financial accommodations to the Borrower;

     WHEREAS, the Guarantor expects to realize direct and indirect benefits as a
result of the availability of the aforementioned loans to the Borrower and the
resulting financial and business support which will be provided to the Guarantor
by the Borrower; and

     WHEREAS, as a condition to the Bank entering into the Credit Agreement, the
Bank has required the Guarantor execute and deliver this Subsidiary Guaranty and
to guaranty the Guarantied Obligations of the Borrower on the terms and
conditions hereinafter set forth.

     NOW, THEREFORE, in consideration of the premises set forth above, the terms
and conditions contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:

     1.   Definitions. This Subsidiary Guaranty is one of the Loan Documents.
Terms defined in the Credit Agreement and not otherwise defined herein are used
herein as therein defined. In addition, as used herein, the following terms
shall have the meanings respectively set forth after each:

     "Bank" has the meaning set forth in the first paragraph hereof.

     "Guarantied Obligations" means all Obligations, liabilities and other
Indebtedness of the Borrower at any time and from time to time owed to the Bank
in respect of the Credit Agreement, each of the other Loan Documents or any
Hedge Agreement to which the Borrower is a party (including, without limitation,
(a) principal of and interest on all Advances and the Term Loan outstanding from
time to time under the Credit Agreement (or evidenced by Line of Credit Note or
the Term Note) and (b) any amounts in respect of fees and costs of the Bank that
are required to be repaid by the Borrower, in each case whether due or to become
due, matured or unmatured, liquidated or unliquidated, or contingent or
non-contingent, including obligations of performance as well as obligations of
payment, and including interest that accrues after the commencement of any
bankruptcy or insolvency proceeding by or against the Borrower, the Guarantor or
any other Person.

<PAGE>

     "Subsidiary Guaranty" means this Subsidiary Guaranty, and any extensions,
modifications, renewals, restatements, reaffirmations, supplements or amendments
hereof.

     2.   Guaranty of Guarantied Obligations. The Guarantor hereby, irrevocably
and unconditionally guaranties and promises to pay and perform on demand the
Guarantied Obligations and each and every one of them, including all amendments,
modifications, supplements, renewals or extensions of any of them, whether such
amendments, modifications, supplements, renewals or extensions are evidenced by
new or additional instruments, documents or agreements or change in the rate of
interest on any Guarantied Obligation or the security therefor, or otherwise.

     3.   Nature of Guaranty. This Subsidiary Guaranty is irrevocable and
continuing in nature and relates to any Guarantied Obligations now existing or
hereafter arising. This Subsidiary Guaranty is a guaranty of prompt and punctual
payment and performance and is not merely a guaranty of collection.

     4.   Relationship to Other Agreements. Nothing herein shall in any way
modify or limit the effect of terms or conditions set forth in any other
document, instrument or agreement executed by the Guarantor or in connection
with the Guarantied Obligations, but each and every term and condition hereof
shall be in addition thereto. All provisions contained in the Credit Agreement
or any other Loan Document that apply to Loan Documents generally are fully
applicable to this Subsidiary Guaranty and are incorporated herein by this
reference.

     5.   Subordination of Indebtedness of the Borrower to the Guarantor to the
Guarantied Obligations. The Guarantor agrees that:

     (a)  Any Indebtedness of the Borrower now or hereafter owed to the
Guarantor hereby is subordinated in right of payment to the Guarantied
Obligations.

     (b)  If the Bank so requests, upon the occurrence and during the
continuance of any Event of Default, all such Indebtedness of the Borrower now
or hereafter owed to the Guarantor shall be collected, enforced and received by
the Guarantor as trustee for the Bank and shall be paid over to the Bank in kind
on account of the Guarantied Obligations, but without reducing or affecting in
any manner the obligations of the Guarantor under the other provisions of this
Subsidiary Guaranty.

     (c)  Should the Guarantor fail to collect or enforce any such Indebtedness
of the Borrower now or hereafter owed to the Guarantor and pay the proceeds
thereof to Bank in accordance with Section 5(b) hereof, the Bank as the
Guarantor's attorney-in-fact may do such acts and sign such documents in the
Guarantor's name as the Bank considers necessary or desirable to effect such
collection, enforcement and/or payment.

     6.   Waivers and Consents. The Guarantor acknowledges that the obligations
undertaken herein involve the guaranty of obligations of Persons other than that
of the Guarantor and, in full recognition of that fact, consents and agrees that
the Bank may, at any time and from time to time, without notice or demand, and
without affecting the enforceability or continuing effectiveness hereof: (a)
supplement, modify, amend, extend, renew, accelerate or otherwise change the
time for payment or the terms of the Guarantied Obligations or any part thereof,

                                       2
<PAGE>

including any increase or decrease of the rate(s) of interest thereon; (b)
supplement, modify, amend or waive, or enter into or give any agreement,
approval or consent with respect to, the Guarantied Obligations or any part
thereof, or any of the Loan Documents to which the Guarantor is not a party or
any additional security or guaranties, or any condition, covenant, default,
remedy, right, representation or term thereof or thereunder; (c) accept new or
additional instruments, documents or agreements in exchange for or relative to
any of the Loan Documents or the Guarantied Obligations or any part thereof; (d)
accept partial payments on the Guarantied Obligations; (e) receive and hold
additional security or guaranties for the Guarantied Obligations or any part
thereof; (f) release, reconvey, terminate, waive, abandon, fail to perfect,
subordinate, exchange, substitute, transfer and/or enforce any security or
guaranties, and apply any security and direct the order or manner of sale
thereof as the Bank in its sole and absolute discretion may determine; (g)
release any Person from any personal liability with respect to the Guarantied
Obligations or any part thereof; (h) settle, release on terms satisfactory to
the Bank or by operation of applicable laws or otherwise liquidate or enforce
any Guarantied Obligations and any security or guaranty therefor in any manner,
consent to the transfer of any security and bid and purchase at any sale; and/or
(i) consent to the merger, change or any other restructuring or termination of
the corporate existence of the Borrower, the Guarantor or any other Person, and
correspondingly restructure the Guarantied Obligations, and any such merger,
change, restructuring or termination shall not affect the liability of the
Guarantor or the continuing effectiveness hereof, or the enforceability hereof
with respect to all or any part of the Guarantied Obligations.

     Upon the occurrence and during the continuance of any Event of Default, the
Bank may enforce this Subsidiary Guaranty independently as to the Guarantor and
independently of any other remedy or security the Bank at any time may have or
hold in connection with the Guarantied Obligations. The Guarantor expressly
waives any right to require the Bank to marshal assets in favor of the Borrower
or to proceed against the Borrower, or against any other guarantor of or other
surety for the Guarantied Obligations, or upon or against any security or
remedy, before proceeding to enforce this Subsidiary Guaranty, in such order as
it shall determine in its sole and absolute discretion. The Bank may file a
separate action or actions against the Borrower and/or the Guarantor without
respect to whether action is brought or prosecuted with respect to any security
or against any other Person, or whether any other Person is joined in any such
action or actions. The Guarantor agrees that the Bank and the Borrower and any
Affiliates of the Borrower may deal with each other in connection with the
Guarantied Obligations or otherwise, or alter any contracts or agreements now or
hereafter existing between any of them, in any manner whatsoever, all without in
any way altering or affecting the security of this Subsidiary Guaranty. The
Bank's rights hereunder shall be reinstated and revived, and the enforceability
of this Subsidiary Guaranty shall continue, with respect to any amount at any
time paid on account of the Guarantied Obligations which thereafter shall be
required to be restored or returned by the Bank upon the bankruptcy, insolvency
or reorganization of the Borrower or any other Person, or otherwise, all as
though such amount had not been paid. The rights of the Bank created or granted
herein and the enforceability of this Subsidiary Guaranty with respect to the
Guarantor at all times shall remain effective to guaranty the full amount of all
the Guarantied Obligations even though the Guarantied Obligations, or any part
thereof, or any security or guaranty therefor, may be or hereafter may become
invalid or otherwise unenforceable as against the Borrower or any other surety
and whether or not the Borrower shall have any personal liability with respect
thereto. The Guarantor expressly waives any and all defenses now or

                                       3
<PAGE>

hereafter arising or asserted by reason of (a) any disability or other defense
of the Borrower with respect to the Guarantied Obligations, (b) the
unenforceability or invalidity of any security or guaranty for the Guarantied
Obligations or the lack of perfection or continuing perfection or failure of
priority of any security for the Guarantied Obligations, (c) the cessation for
any cause whatsoever of the liability of the Borrower (other than by reason of
the full payment and performance of all Guarantied Obligations), (d) any failure
of the Bank to marshal assets in favor of the Borrower or any other Person, (e)
any act or omission of the Bank or others that directly or indirectly results in
or aids the discharge or release of the Borrower or the Guarantied Obligations
or any security or guaranty therefor by operation of law or otherwise, (f) any
law which provides that the obligation of a surety or guarantor must neither be
larger in amount nor in other respects more burdensome than that of the
principal or which reduces a surety's or guarantor's obligation in proportion to
the principal obligation, (g) any failure of the Bank or others to file or
enforce a claim in any bankruptcy or insolvency, administration, receivership,
creditors arrangement or other analogous proceeding with respect to any Person,
(h) the election by the Bank, in any bankruptcy proceeding of any Person, of the
application or non-application of Section 1111(b)(2) of the Bankruptcy Code, (i)
any extension of credit or the grant of any Lien under Section 364 of the
Bankruptcy Code, (j) any use of cash collateral under Section 363 of the
Bankruptcy Code, (k) any agreement or stipulation with respect to the provision
of adequate protection in any bankruptcy proceeding of any Person, (l) the
avoidance of any Lien or security in favor of the Bank for any reason, (m) any
bankruptcy, insolvency, administration, receivership, or analogous situations,
reorganization, arrangement, readjustment of debt, liquidation or dissolution
proceeding commenced by or against any Person, including any discharge of, or
bar or stay against collecting, all or any of the Guarantied Obligations (or any
interest thereon) in or as a result of any such proceeding, or (n) any action
taken by the Bank that is authorized by this Section or any other provision of
any Loan Document. The Guarantor expressly waives all setoffs and counterclaims
(except the Guarantor shall be entitled to assert any claim that is available to
the primary obligor in respect of the Guarantied Obligations; provided that no
such claim shall excuse the Guarantor from its obligation to pay the Guarantied
Obligations upon demand pursuant to Section 2 hereof), presentment, demands for
payment or performance, notices of nonpayment or nonperformance, protests,
notices of protest, notices of dishonor and all other notices or demands of any
kind or nature whatsoever with respect to the Guarantied Obligations (except
notices expressly required by the Loan Documents), and all notices of acceptance
of this Subsidiary Guaranty or of the existence, creation or incurrence of new
or additional Guarantied Obligations.

     Without limiting the foregoing, the Guarantor intends to waive any and all
of the rights and defenses described in California Civil Code Sections
2819-2825, inclusive, and 2856(a) (including any similar laws enacted and in
effect in any other jurisdiction), without regard to the inclusion of any
particular language or phrases in this Subsidiary Guaranty to waive any such
rights and defenses or any references to statutory provisions or judicial
decisions.

     7.   Condition of the Borrower and Subsidiaries. The Guarantor represents
and warrants to the Bank that the Guarantor has established adequate means of
obtaining from the Borrower, on a continuing basis, financial and other
information pertaining to the businesses, operations and condition (financial
and otherwise) of the Borrower and its properties, and the Guarantor now is and
hereafter will be completely familiar with the businesses, operations and
condition (financial and otherwise) of the Borrower and its properties. The
Guarantor hereby

                                       4
<PAGE>

expressly waives and relinquishes any duty on the part of the Bank (should any
such duty exist) to disclose to the Guarantor any matter, fact or thing related
to the businesses, operations or condition (financial or otherwise) of the
Borrower or its properties, whether now known or hereafter known by the Bank
during the life of this Subsidiary Guaranty. With respect to any of the
Guarantied Obligations, the Bank need not inquire into the powers of the
Borrower or the officers or employees acting or purporting to act on its behalf,
and all Guarantied Obligations made or created in good faith reliance upon the
professed exercise of such powers shall be secured hereby.

     8.   Liens on Real Property. In the event that all or any part of the
Guarantied Obligations at any time are secured by any mortgage, charge or other
instruments creating or granting Liens on any interests in real property or
land, the Guarantor authorizes the Bank, upon the occurrence of and during the
continuance of any Event of Default, at its sole option, without notice or
demand and without affecting any Guarantied Obligations of the Guarantor, the
enforceability of this Subsidiary Guaranty, or the validity or enforceability of
any Liens of the Bank on any collateral, to foreclose or enforce any or all
mortgages, charges or other instruments by judicial or nonjudicial sale or by
otherwise selling the relevant real property or land under the terms of such
mortgage, charge or other instrument. The Guarantor expressly waives all rights
and defenses that the Guarantor may have because the obligations of the Borrower
under the Loan Documents to which it is a party are secured by real property.
This means, among other things, that the Bank may collect from the Guarantor
without first foreclosing on any personal or real property collateral pledged by
Borrower. If the Bank forecloses or enforces on any real property collateral
pledged by the Borrower, the amount of the obligations of the Borrower under the
Loan Documents to which it is a party may be reduced only by the price for which
that collateral is sold at the foreclosure sale, even if the collateral is worth
more than the sale price, and the Bank may collect from the Guarantor even if
the Bank, by foreclosing on the real property collateral, has destroyed any
right that the Guarantor may have to collect from the Borrower. This is an
unconditional and irrevocable waiver of any rights and defenses the Guarantor
may have because the obligations of the Borrower under the Loan Documents to
which it is a party are secured by real property. These rights and defenses
include, but are not limited to, any rights or defenses based upon Section 580a,
580b, 580d, or 726 of the California Code of Civil Procedure (and any similar
laws enacted and in effect in any other jurisdiction). The Guarantor further
waives all rights and defenses arising out of an election of remedies by the
Bank, even though that election of remedies, such as a nonjudicial foreclosure
with respect to security for a Guarantied Obligation, has destroyed the
Guarantor's rights of subrogation and reimbursement against the Borrower by the
operation of Section 580d of the California Code of Civil Procedure or
otherwise. The Guarantor expressly waives any right to receive notice of any
judicial or nonjudicial foreclosure or sale of any real property or interest
therein subject to any such deeds of trust or mortgages or other instruments and
the Guarantor's or any other Person's failure to receive any such notice shall
not impair or affect the Guarantor's Obligations or the enforceability of this
Subsidiary Guaranty or any rights of the Bank created or granted hereby.

     9.   Subordination of Subrogation Claims. Without limiting the provisions
of Section 5 hereof, the Guarantor agrees to waive any and all claims of the
Guarantor against the Borrower, any endorser or any other guarantor or surety
with respect to all or any part of the Guarantied Obligations, or against any of
their respective properties, including any and all rights of subrogation,
reimbursement, indemnification and contribution. Notwithstanding any right of

                                       5
<PAGE>

the Guarantor to ask, demand, sue for, take or receive any payment from the
Borrower, all rights, Liens and security interests of the Guarantor, whether now
or hereafter arising and howsoever existing, in any assets of the Borrower shall
be and hereby are subordinated to the rights of the Bank.

     10.  Understandings With Respect to Waivers and Consents. The Guarantor
warrants and agrees that each of the waivers and consents set forth herein are
made with full knowledge of their significance and consequences, with the
understanding that events giving rise to any defense or right waived may
diminish, destroy or otherwise adversely affect rights which the Guarantor
otherwise may have against the Borrower, the Bank or others, or against any
collateral, and that, under the circumstances, the waivers and consents herein
given are reasonable and not contrary to public policy or law. The Guarantor
acknowledges that it has either consulted with legal counsel regarding the
effect of this Subsidiary Guaranty and the waivers and consents set forth
herein, or has made an informed decision not to do so. If this Subsidiary
Guaranty or any of the waivers or consents herein are determined to be
unenforceable under or in violation of applicable law, this Subsidiary Guaranty
and such waivers and consents shall be effective to the maximum extent permitted
by law.

     11.  Representations and Warranties. The Guarantor hereby makes as to it
each and every representation and warranty applicable to the Guarantor set forth
in Article II of the Credit Agreement as if set forth in full herein.

     12.  Costs and Expenses. The Guarantor shall pay promptly upon demand, the
reasonable costs and expenses of the Bank in connection with the negotiation,
preparation, syndication, execution and delivery of the Loan Documents and any
amendment thereof or waiver thereof. The Guarantor shall also pay on demand, the
reasonable costs and expenses of the Bank in connection with the restructuring,
reorganization (including a bankruptcy reorganization of the Borrower) and
enforcement or attempted enforcement of the Loan Documents, and any matter
related thereto. The foregoing costs and expenses shall include any applicable
filing fees, recording fees, search fees, and other out-of-pocket expenses and
the reasonable fees and out-of-pocket expenses of any legal counsel (including
reasonably allocated costs of legal counsel employed by the Bank), independent
public accountants and other outside experts retained by the Bank, whether or
not such costs and expenses are incurred or suffered by the Bank in connection
with or during the course of any bankruptcy or insolvency proceedings of the
Borrower.

     13.  Construction of this Guaranty. This Subsidiary Guaranty is intended to
give rise to absolute and unconditional obligations on the part of the
Guarantor; hence, in any construction hereof, notwithstanding any provision of
any Loan Document to the contrary, this Subsidiary Guaranty shall be construed
strictly in favor of the Bank, as the case may be, in order to accomplish its
stated purpose.

     14.  Liability. Notwithstanding anything to the contrary elsewhere
contained herein or in any Loan Document to which the Guarantor is a party, the
aggregate liability of the Guarantor hereunder for payment and performance of
the Guarantied Obligations shall not exceed an amount which, in the aggregate,
is $1.00 less than that amount which if so paid or performed by the Guarantor
would constitute or result in a "fraudulent transfer", "fraudulent conveyance",
or

                                       6
<PAGE>

terms of similar import, under applicable state or federal law, including
without limitation, Section 548 of the Bankruptcy Code. The liability of the
Guarantor hereunder is independent of any other guaranties at any time in effect
with respect to all or any part of the Guarantied Obligations, and the
Guarantor's liability hereunder may be enforced regardless of the existence of
any such guaranties. Any termination by or release of any guarantor in whole or
in part shall not affect the continuing liability of the Guarantor hereunder,
and no notice of any such termination or release shall be required. The
execution hereof by the Guarantor is not founded upon an expectation or
understanding that there will be any other guarantor of the Guarantied
Obligations.

     15.  THIS SUBSIDIARY GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA.

     16.  Arbitration.

     (a)  Arbitration. The parties hereto agree, upon demand by any party, to
submit to binding arbitration all claims, disputes and controversies between or
among them (and their respective employees, officers, directors, attorneys, and
other agents), whether in tort, contract or otherwise arising out of or relating
to in any way (i) the loan and related Loan Documents which are the subject of
the Credit Agreement and this Subsidiary Guaranty and the negotiation,
execution, collateralization, administration, repayment, modification,
extension, substitution, formation, inducement, enforcement, default or
termination thereof; or (ii) requests for additional credit thereunder.

     (b)  Governing Rules. Any arbitration proceeding will (i) proceed in a
location in California selected by the American Arbitration Association ("AAA");
(ii) be governed by the Federal Arbitration Act (Title 9 of the United States
Code), notwithstanding any conflicting choice of law provision in any of the
documents between the parties; and (iii) be conducted by the AAA, or such other
administrator as the parties shall mutually agree upon, in accordance with the
AAA's commercial dispute resolution procedures, unless the claim or counterclaim
is at least $1,000,000 exclusive of claimed interest, arbitration fees and costs
in which case the arbitration shall be conducted in accordance with the AAA's
optional procedures for large, complex commercial disputes (the commercial
dispute resolution procedures or the optional procedures for large, complex
commercial disputes to be referred to, as applicable, as the "Rules"). If there
is any inconsistency between the terms hereof and the Rules, the terms and
procedures set forth herein shall control. Any party who fails or refuses to
submit to arbitration following a demand by any other party shall bear all costs
and expenses incurred by such other party in compelling arbitration of any
dispute. Nothing contained herein shall be deemed to be a waiver by any party
that is a bank of the protections afforded to it under 12 U.S.C. ss.91 or any
similar applicable state law.

     (c)  No Waiver of Provisional Remedies, Self-Help and Foreclosure. The
arbitration requirement does not limit the right of any party to (i) foreclose
against real or personal property collateral; (ii) exercise self-help remedies
relating to collateral or proceeds of collateral such as setoff or repossession;
or (iii) obtain provisional or ancillary remedies such as replevin, injunctive
relief, attachment or the appointment of a receiver, before during or after the
pendency

                                       7
<PAGE>

of any arbitration proceeding. This exclusion does not constitute a waiver of
the right or obligation of any party to submit any dispute to arbitration or
reference hereunder, including those arising from the exercise of the actions
detailed in sections (i), (ii) and (iii) of this paragraph.

     (d)  Arbitrator Qualifications and Powers. Any arbitration proceeding in
which the amount in controversy is $5,000,000 or less will be decided by a
single arbitrator selected according to the Rules, and who shall not render an
award of greater than $5,000,000. Any dispute in which the amount in controversy
exceeds $5,000,000 shall be decided by majority vote of a panel of three
arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations. The arbitrator will be a neutral
attorney licensed in the State of California or a neutral retired judge of the
state or federal judiciary of California, in either case with a minimum of ten
years experience in the substantive law applicable to the subject matter of the
dispute to be arbitrated. The arbitrator will determine whether or not an issue
is arbitratable and will give effect to the statutes of limitation in
determining any claim. In any arbitration proceeding the arbitrator will decide
(by documents only or with a hearing at the arbitrator's discretion) any
pre-hearing motions which are similar to motions to dismiss for failure to state
a claim or motions for summary adjudication. The arbitrator shall resolve all
disputes in accordance with the substantive law of California and may grant any
remedy or relief that a court of such state could order or grant within the
scope hereof and such ancillary relief as is necessary to make effective any
award. The arbitrator shall also have the power to award recovery of all costs
and fees, to impose sanctions and to take such other action as the arbitrator
deems necessary to the same extent a judge could pursuant to the Federal Rules
of Civil Procedure, the California Rules of Civil Procedure or other applicable
law. Judgment upon the award rendered by the arbitrator may be entered in any
court having jurisdiction. The institution and maintenance of an action for
judicial relief or pursuit of a provisional or ancillary remedy shall not
constitute a waiver of the right of any party, including the plaintiff, to
submit the controversy or claim to arbitration if any other party contests such
action for judicial relief.

     (e)  Discovery. In any arbitration proceeding discovery will be permitted
in accordance with the Rules. All discovery shall be expressly limited to
matters directly relevant to the dispute being arbitrated and must be completed
no later than 20 days before the hearing date and within 180 days of the filing
of the dispute with the AAA. Any requests for an extension of the discovery
periods, or any discovery disputes, will be subject to final determination by
the arbitrator upon a showing that the request for discovery is essential for
the party's presentation and that no alternative means for obtaining information
is available.

     (f)  Class Proceedings and Consolidations. The resolution of any dispute
arising pursuant to the terms of this Agreement shall be determined by a
separate arbitration proceeding and such dispute shall not be consolidated with
other disputes or included in any class proceeding.

     (g)  Payment Of Arbitration Costs And Fees. The arbitrator shall award all
costs and expenses of the arbitration proceeding.

     (h)  Real Property Collateral; Judicial Reference. Notwithstanding anything
herein to the contrary, no dispute shall be submitted to arbitration if the
dispute concerns indebtedness

                                        8
<PAGE>

secured directly or indirectly, in whole or in part, by any real property unless
(i) the holder of the mortgage, lien or security interest specifically elects in
writing to proceed with the arbitration, or (ii) all parties to the arbitration
waive any rights or benefits that might accrue to them by virtue of the single
action rule statute of California, thereby agreeing that all indebtedness and
obligations of the parties, and all mortgages, liens and security interests
securing such indebtedness and obligations, shall remain fully valid and
enforceable. If any such dispute is not submitted to arbitration, the dispute
shall be referred to a referee in accordance with California Code of Civil
Procedure Section 638 et seq., and this general reference agreement is intended
to be specifically enforceable in accordance with said Section 638. A referee
with the qualifications required herein for arbitrators shall be selected
pursuant to the AAA's selection procedures. Judgment upon the decision rendered
by a referee shall be entered in the court in which such proceeding was
commenced in accordance with California Code of Civil Procedure Sections 644 and
645.

     (i)  Miscellaneous. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business or by applicable law or
regulation. If more than one agreement for arbitration by or between the parties
potentially applies to a dispute, the arbitration provision most directly
related to the Loan Documents or the subject matter of the dispute shall
control. This arbitration provision shall survive termination, amendment or
expiration of any of the Loan Documents or any relationship between the parties.

                                       9
<PAGE>

     IN WITNESS WHEREOF, the Guarantor has executed this Subsidiary Guaranty by
its duly authorized officer as of the date first written above.

                                                      VIRCO MGMT. CORPORATION,
                                                      a Delaware corporation

                                                      By: /s/ Robert E. Dose
                                                         -----------------------
                                                      Name:  Robert E. Dose
                                                      Title: VP Finance

                                                            Signature Page to
                                                         Virgo Mgmt. Corporation
                                                           Subsidiary Guaranty

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.4
<SEQUENCE>6
<FILENAME>v96066exv99w4.txt
<DESCRIPTION>EXHIBIT 99.4
<TEXT>
<PAGE>

                                                                  EXECUTION COPY

EXHIBIT 99.4

                               SUBSIDIARY GUARANTY

         SUBSIDIARY GUARANTY ("SUBSIDIARY GUARANTY") dated as of January 27,
2004 made by Virco, Inc., a Delaware corporation and a subsidiary of the below
referenced Borrower (the "GUARANTOR"), in favor of Wells Fargo Bank, National
Association (the "BANK"), the lender under the Credit Agreement dated as of even
date herewith (as the same may be amended, restated, modified or supplemented
from time to time, the "CREDIT AGREEMENT") between Virco Mfg. Corporation, a
Delaware corporation (the "BORROWER"), and the Bank.

                                    RECITALS

         WHEREAS, pursuant to the Credit Agreement, the Bank has agreed to make
certain loans and extend certain other financial accommodations to the Borrower;

         WHEREAS, the Guarantor expects to realize direct and indirect benefits
as a result of the availability of the aforementioned loans to the Borrower and
the resulting financial and business support which will be provided to the
Guarantor by the Borrower; and

         WHEREAS, as a condition to the Bank entering into the Credit Agreement,
the Bank has required the Guarantor execute and deliver this Subsidiary Guaranty
and to guaranty the Guarantied Obligations of the Borrower on the terms and
conditions hereinafter set forth.

         NOW, THEREFORE, in consideration of the premises set forth above, the
terms and conditions contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:

         1. Definitions. This Subsidiary Guaranty is one of the Loan Documents.
Terms defined in the Credit Agreement and not otherwise defined herein are used
herein as therein defined. In addition, as used herein, the following terms
shall have the meanings respectively set forth after each:

         "Bank" has the meaning set forth in the first paragraph hereof.

         "Guarantied Obligations" means all Obligations, liabilities and other
Indebtedness of the Borrower at any time and from time to time owed to the Bank
in respect of the Credit Agreement, each of the other Loan Documents or any
Hedge Agreement to which the Borrower is a party (including, without limitation,
(a) principal of and interest on all Advances and the Term Loan outstanding from
time to time under the Credit Agreement (or evidenced by Line of Credit Note or
the Term Note) and (b) any amounts in respect of fees and costs of the Bank that
are required to be repaid by the Borrower, in each case whether due or to become
due, matured or unmatured, liquidated or unliquidated, or contingent or
non-contingent, including obligations of performance as well as obligations of
payment, and including interest that accrues after the commencement of any
bankruptcy or insolvency proceeding by or against the Borrower, the Guarantor or
any other Person.

<PAGE>

         "Subsidiary Guaranty" means this Subsidiary Guaranty, and any
extensions, modifications, renewals, restatements, reaffirmations, supplements
or amendments hereof.

         2.       Guaranty of Guarantied Obligations. The Guarantor hereby,
irrevocably and unconditionally guaranties and promises to pay and perform on
demand the Guarantied Obligations and each and every one of them, including all
amendments, modifications, supplements, renewals or extensions of any of them,
whether such amendments, modifications, supplements, renewals or extensions are
evidenced by new or additional instruments, documents or agreements or change in
the rate of interest on any Guarantied Obligation or the security therefor, or
otherwise.

         3.       Nature of Guaranty. This Subsidiary Guaranty is irrevocable
and continuing in nature and relates to any Guarantied Obligations now existing
or hereafter arising. This Subsidiary Guaranty is a guaranty of prompt and
punctual payment and performance and is not merely a guaranty of collection.

         4.       Relationship to Other Agreements. Nothing herein shall in any
way modify or limit the effect of terms or conditions set forth in any other
document, instrument or agreement executed by the Guarantor or in connection
with the Guarantied Obligations, but each and every term and condition hereof
shall be in addition thereto. All provisions contained in the Credit Agreement
or any other Loan Document that apply to Loan Documents generally are fully
applicable to this Subsidiary Guaranty and are incorporated herein by this
reference.

         5.       Subordination of Indebtedness of the Borrower to the Guarantor
to the Guarantied Obligations. The Guarantor agrees that:

         (a)      Any Indebtedness of the Borrower now or hereafter owed to the
Guarantor hereby is subordinated in right of payment to the Guarantied
Obligations.

         (b)      If the Bank so requests, upon the occurrence and during the
continuance of any Event of Default, all such Indebtedness of the Borrower now
or hereafter owed to the Guarantor shall be collected, enforced and received by
the Guarantor as trustee for the Bank and shall be paid over to the Bank in kind
on account of the Guarantied Obligations, but without reducing or affecting in
any manner the obligations of the Guarantor under the other provisions of this
Subsidiary Guaranty.

         (c)      Should the Guarantor fail to collect or enforce any such
Indebtedness of the Borrower now or hereafter owed to the Guarantor and pay the
proceeds thereof to Bank in accordance with Section 5(b) hereof, the Bank as the
Guarantor's attorney-in-fact may do such acts and sign such documents in the
Guarantor's name as the Bank considers necessary or desirable to effect such
collection, enforcement and/or payment.

         6.       Waivers and Consents. The Guarantor acknowledges that the
obligations undertaken herein involve the guaranty of obligations of Persons
other than that of the Guarantor and, in full recognition of that fact, consents
and agrees that the Bank may, at any time and from time to time, without notice
or demand, and without affecting the enforceability or continuing effectiveness
hereof: (a) supplement, modify, amend, extend, renew, accelerate or otherwise
change the time for payment or the terms of the Guarantied Obligations or any
part thereof,

                                       2

<PAGE>

including any increase or decrease of the rate(s) of interest thereon; (b)
supplement, modify, amend or waive, or enter into or give any agreement,
approval or consent with respect to, the Guarantied Obligations or any part
thereof, or any of the Loan Documents to which the Guarantor is not a party or
any additional security or guaranties, or any condition, covenant, default,
remedy, right, representation or term thereof or thereunder; (c) accept new or
additional instruments, documents or agreements in exchange for or relative to
any of the Loan Documents or the Guarantied Obligations or any part thereof; (d)
accept partial payments on the Guarantied Obligations; (e) receive and hold
additional security or guaranties for the Guarantied Obligations or any part
thereof; (f) release, reconvey, terminate, waive, abandon, fail to perfect,
subordinate, exchange, substitute, transfer and/or enforce any security or
guaranties, and apply any security and direct the order or manner of sale
thereof as the Bank in its sole and absolute discretion may determine; (g)
release any Person from any personal liability with respect to the Guarantied
Obligations or any part thereof; (h) settle, release on terms satisfactory to
the Bank or by operation of applicable laws or otherwise liquidate or enforce
any Guarantied Obligations and any security or guaranty therefor in any manner,
consent to the transfer of any security and bid and purchase at any sale; and/or
(i) consent to the merger, change or any other restructuring or termination of
the corporate existence of the Borrower, the Guarantor or any other Person, and
correspondingly restructure the Guarantied Obligations, and any such merger,
change, restructuring or termination shall not affect the liability of the
Guarantor or the continuing effectiveness hereof, or the enforceability hereof
with respect to all or any part of the Guarantied Obligations.

         Upon the occurrence and during the continuance of any Event of Default,
the Bank may enforce this Subsidiary Guaranty independently as to the Guarantor
and independently of any other remedy or security the Bank at any time may have
or hold in connection with the Guarantied Obligations. The Guarantor expressly
waives any right to require the Bank to marshal assets in favor of the Borrower
or to proceed against the Borrower, or against any other guarantor of or other
surety for the Guarantied Obligations, or upon or against any security or
remedy, before proceeding to enforce this Subsidiary Guaranty, in such order as
it shall determine in its sole and absolute discretion. The Bank may file a
separate action or actions against the Borrower and/or the Guarantor without
respect to whether action is brought or prosecuted with respect to any security
or against any other Person, or whether any other Person is joined in any such
action or actions. The Guarantor agrees that the Bank and the Borrower and any
Affiliates of the Borrower may deal with each other in connection with the
Guarantied Obligations or otherwise, or alter any contracts or agreements now or
hereafter existing between any of them, in any manner whatsoever, all without in
any way altering or affecting the security of this Subsidiary Guaranty. The
Bank's rights hereunder shall be reinstated and revived, and the enforceability
of this Subsidiary Guaranty shall continue, with respect to any amount at any
time paid on account of the Guarantied Obligations which thereafter shall be
required to be restored or returned by the Bank upon the bankruptcy, insolvency
or reorganization of the Borrower or any other Person, or otherwise, all as
though such amount had not been paid. The rights of the Bank created or granted
herein and the enforceability of this Subsidiary Guaranty with respect to the
Guarantor at all times shall remain effective to guaranty the full amount of all
the Guarantied Obligations even though the Guarantied Obligations, or any part
thereof, or any security or guaranty therefor, may be or hereafter may become
invalid or otherwise unenforceable as against the Borrower or any other surety
and whether or not the Borrower shall have any personal liability with respect
thereto. The Guarantor expressly waives any and all defenses now or

                                       3

<PAGE>

hereafter arising or asserted by reason of (a) any disability or other defense
of the Borrower with respect to the Guarantied Obligations, (b) the
unenforceability or invalidity of any security or guaranty for the Guarantied
Obligations or the lack of perfection or continuing perfection or failure of
priority of any security for the Guarantied Obligations, (c) the cessation for
any cause whatsoever of the liability of the Borrower (other than by reason of
the full payment and performance of all Guarantied Obligations), (d) any failure
of the Bank to marshal assets in favor of the Borrower or any other Person, (e)
any act or omission of the Bank or others that directly or indirectly results in
or aids the discharge or release of the Borrower or the Guarantied Obligations
or any security or guaranty therefor by operation of law or otherwise, (f) any
law which provides that the obligation of a surety or guarantor must neither be
larger in amount nor in other respects more burdensome than that of the
principal or which reduces a surety's or guarantor's obligation in proportion to
the principal obligation, (g) any failure of the Bank or others to file or
enforce a claim in any bankruptcy or insolvency, administration, receivership,
creditors arrangement or other analogous proceeding with respect to any Person,
(h) the election by the Bank, in any bankruptcy proceeding of any Person, of the
application or non-application of Section 1111(b)(2) of the Bankruptcy Code, (i)
any extension of credit or the grant of any Lien under Section 364 of the
Bankruptcy Code, (j) any use of cash collateral under Section 363 of the
Bankruptcy Code, (k) any agreement or stipulation with respect to the provision
of adequate protection in any bankruptcy proceeding of any Person, (l) the
avoidance of any Lien or security in favor of the Bank for any reason, (m) any
bankruptcy, insolvency, administration, receivership, or analogous situations,
reorganization, arrangement, readjustment of debt, liquidation or dissolution
proceeding commenced by or against any Person, including any discharge of, or
bar or stay against collecting, all or any of the Guarantied Obligations (or any
interest thereon) in or as a result of any such proceeding, or (n) any action
taken by the Bank that is authorized by this Section or any other provision of
any Loan Document. The Guarantor expressly waives all setoffs and counterclaims
(except the Guarantor shall be entitled to assert any claim that is available to
the primary obligor in respect of the Guarantied Obligations; provided that no
such claim shall excuse the Guarantor from its obligation to pay the Guarantied
Obligations upon demand pursuant to Section 2 hereof), presentment, demands for
payment or performance, notices of nonpayment or nonperformance, protests,
notices of protest, notices of dishonor and all other notices or demands of any
kind or nature whatsoever with respect to the Guarantied Obligations (except
notices expressly required by the Loan Documents), and all notices of acceptance
of this Subsidiary Guaranty or of the existence, creation or incurrence of new
or additional Guarantied Obligations.

         Without limiting the foregoing, the Guarantor intends to waive any and
all of the rights and defenses described in California Civil Code Sections
2819-2825, inclusive, and 2856(a) (including any similar laws enacted and in
effect in any other jurisdiction), without regard to the inclusion of any
particular language or phrases in this Subsidiary Guaranty to waive any such
rights and defenses or any references to statutory provisions or judicial
decisions.

         7.       Condition of the Borrower and Subsidiaries. The Guarantor
represents and warrants to the Bank that the Guarantor has established adequate
means of obtaining from the Borrower, on a continuing basis, financial and other
information pertaining to the businesses, operations and condition (financial
and otherwise) of the Borrower and its properties, and the Guarantor now is and
hereafter will be completely familiar with the businesses, operations and
condition (financial and otherwise) of the Borrower and its properties. The
Guarantor hereby

                                       4

<PAGE>

expressly waives and relinquishes any duty on the part of the Bank (should any
such duty exist) to disclose to the Guarantor any matter, fact or thing related
to the businesses, operations or condition (financial or otherwise) of the
Borrower or its properties, whether now known or hereafter known by the Bank
during the life of this Subsidiary Guaranty. With respect to any of the
Guarantied Obligations, the Bank need not inquire into the powers of the
Borrower or the officers or employees acting or purporting to act on its behalf,
and all Guarantied Obligations made or created in good faith reliance upon the
professed exercise of such powers shall be secured hereby.

         8.       Liens on Real Property. In the event that all or any part of
the Guarantied Obligations at any time are secured by any mortgage, charge or
other instruments creating or granting Liens on any interests in real property
or land, the Guarantor authorizes the Bank, upon the occurrence of and during
the continuance of any Event of Default, at its sole option, without notice or
demand and without affecting any Guarantied Obligations of the Guarantor, the
enforceability of this Subsidiary Guaranty, or the validity or enforceability of
any Liens of the Bank on any collateral, to foreclose or enforce any or all
mortgages, charges or other instruments by judicial or nonjudicial sale or by
otherwise selling the relevant real property or land under the terms of such
mortgage, charge or other instrument. The Guarantor expressly waives all rights
and defenses that the Guarantor may have because the obligations of the Borrower
under the Loan Documents to which it is a party are secured by real property.
This means, among other things, that the Bank may collect from the Guarantor
without first foreclosing on any personal or real property collateral pledged by
Borrower. If the Bank forecloses or enforces on any real property collateral
pledged by the Borrower, the amount of the obligations of the Borrower under the
Loan Documents to which it is a party may be reduced only by the price for which
that collateral is sold at the foreclosure sale, even if the collateral is worth
more than the sale price, and the Bank may collect from the Guarantor even if
the Bank, by foreclosing on the real property collateral, has destroyed any
right that the Guarantor may have to collect from the Borrower. This is an
unconditional and irrevocable waiver of any rights and defenses the Guarantor
may have because the obligations of the Borrower under the Loan Documents to
which it is a party are secured by real property. These rights and defenses
include, but are not limited to, any rights or defenses based upon Section 580a,
580b, 580d, or 726 of the California Code of Civil Procedure (and any similar
laws enacted and in effect in any other jurisdiction). The Guarantor further
waives all rights and defenses arising out of an election of remedies by the
Bank, even though that election of remedies, such as a nonjudicial foreclosure
with respect to security for a Guarantied Obligation, has destroyed the
Guarantor's rights of subrogation and reimbursement against the Borrower by the
operation of Section 580d of the California Code of Civil Procedure or
otherwise. The Guarantor expressly waives any right to receive notice of any
judicial or nonjudicial foreclosure or sale of any real property or interest
therein subject to any such deeds of trust or mortgages or other instruments and
the Guarantor's or any other Person's failure to receive any such notice shall
not impair or affect the Guarantor's Obligations or the enforceability of this
Subsidiary Guaranty or any rights of the Bank created or granted hereby.

         9.       Subordination of Subrogation Claims. Without limiting the
provisions of Section 5 hereof, the Guarantor agrees to waive any and all claims
of the Guarantor against the Borrower, any endorser or any other guarantor or
surety with respect to all or any part of the Guarantied Obligations, or against
any of their respective properties, including any and all rights of subrogation,
reimbursement, indemnification and contribution. Notwithstanding any right of

                                       5

<PAGE>

the Guarantor to ask, demand, sue for, take or receive any payment from the
Borrower, all rights, Liens and security interests of the Guarantor, whether now
or hereafter arising and howsoever existing, in any assets of the Borrower shall
be and hereby are subordinated to the rights of the Bank.

         10.      Understandings With Respect to Waivers and Consents. The
Guarantor warrants and agrees that each of the waivers and consents set forth
herein are made with full knowledge of their significance and consequences, with
the understanding that events giving rise to any defense or right waived may
diminish, destroy or otherwise adversely affect rights which the Guarantor
otherwise may have against the Borrower, the Bank or others, or against any
collateral, and that, under the circumstances, the waivers and consents herein
given are reasonable and not contrary to public policy or law. The Guarantor
acknowledges that it has either consulted with legal counsel regarding the
effect of this Subsidiary Guaranty and the waivers and consents set forth
herein, or has made an informed decision not to do so. If this Subsidiary
Guaranty or any of the waivers or consents herein are determined to be
unenforceable under or in violation of applicable law, this Subsidiary Guaranty
and such waivers and consents shall be effective to the maximum extent permitted
by law.

         11.      Representations and Warranties. The Guarantor hereby makes as
to it each and every representation and warranty applicable to the Guarantor set
forth in Article II of the Credit Agreement as if set forth in full herein.

         12.      Costs and Expenses. The Guarantor shall pay promptly upon
demand, the reasonable costs and expenses of the Bank in connection with the
negotiation, preparation, syndication, execution and delivery of the Loan
Documents and any amendment thereof or waiver thereof. The Guarantor shall also
pay on demand, the reasonable costs and expenses of the Bank in connection with
the restructuring, reorganization (including a bankruptcy reorganization of the
Borrower) and enforcement or attempted enforcement of the Loan Documents, and
any matter related thereto. The foregoing costs and expenses shall include any
applicable filing fees, recording fees, search fees, and other out-of-pocket
expenses and the reasonable fees and out-of-pocket expenses of any legal counsel
(including reasonably allocated costs of legal counsel employed by the Bank),
independent public accountants and other outside experts retained by the Bank,
whether or not such costs and expenses are incurred or suffered by the Bank in
connection with or during the course of any bankruptcy or insolvency proceedings
of the Borrower.

         13.      Construction of this Guaranty. This Subsidiary Guaranty is
intended to give rise to absolute and unconditional obligations on the part of
the Guarantor; hence, in any construction hereof, notwithstanding any provision
of any Loan Document to the contrary, this Subsidiary Guaranty shall be
construed strictly in favor of the Bank, as the case may be, in order to
accomplish its stated purpose.

         14.      Liability. Notwithstanding anything to the contrary elsewhere
contained herein or in any Loan Document to which the Guarantor is a party, the
aggregate liability of the Guarantor hereunder for payment and performance of
the Guarantied Obligations shall not exceed an amount which, in the aggregate,
is $1.00 less than that amount which if so paid or performed by the Guarantor
would constitute or result in a "fraudulent transfer", "fraudulent conveyance",
or

                                       6

<PAGE>

terms of similar import, under applicable state or federal law, including
without limitation, Section 548 of the Bankruptcy Code. The liability of the
Guarantor hereunder is independent of any other guaranties at any time in effect
with respect to all or any part of the Guarantied Obligations, and the
Guarantor's liability hereunder may be enforced regardless of the existence of
any such guaranties. Any termination by or release of any guarantor in whole or
in part shall not affect the continuing liability of the Guarantor hereunder,
and no notice of any such termination or release shall be required. The
execution hereof by the Guarantor is not founded upon an expectation or
understanding that there will be any other guarantor of the Guarantied
Obligations.

         15.      THIS SUBSIDIARY GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED
AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA.

         16.      Arbitration.

         (a)      Arbitration. The parties hereto agree, upon demand by any
party, to submit to binding arbitration all claims, disputes and controversies
between or among them (and their respective employees, officers, directors,
attorneys, and other agents), whether in tort, contract or otherwise arising out
of or relating to in any way (i) the loan and related Loan Documents which are
the subject of the Credit Agreement and this Subsidiary Guaranty and the
negotiation, execution, collateralization, administration, repayment,
modification, extension, substitution, formation, inducement, enforcement,
default or termination thereof; or (ii) requests for additional credit
thereunder.

         (b)      Governing Rules. Any arbitration proceeding will (i) proceed
in a location in California selected by the American Arbitration Association
("AAA"); (ii) be governed by the Federal Arbitration Act (Title 9 of the United
States Code), notwithstanding any conflicting choice of law provision in any of
the documents between the parties; and (iii) be conducted by the AAA, or such
other administrator as the parties shall mutually agree upon, in accordance with
the AAA's commercial dispute resolution procedures, unless the claim or
counterclaim is at least $1,000,000 exclusive of claimed interest, arbitration
fees and costs in which case the arbitration shall be conducted in accordance
with the AAA's optional procedures for large, complex commercial disputes (the
commercial dispute resolution procedures or the optional procedures for large,
complex commercial disputes to be referred to, as applicable, as the "Rules").
If there is any inconsistency between the terms hereof and the Rules, the terms
and procedures set forth herein shall control. Any party who fails or refuses to
submit to arbitration following a demand by any other party shall bear all costs
and expenses incurred by such other party in compelling arbitration of any
dispute. Nothing contained herein shall be deemed to be a waiver by any party
that is a bank of the protections afforded to it under 12 U.S.C. Section 91 or
any similar applicable state law.

         (c)      No Waiver of Provisional Remedies, Self-Help and Foreclosure.
The arbitration requirement does not limit the right of any party to (i)
foreclose against real or personal property collateral; (ii) exercise self-help
remedies relating to collateral or proceeds of collateral such as setoff or
repossession; or (iii) obtain provisional or ancillary remedies such as
replevin, injunctive relief, attachment or the appointment of a receiver, before
during or after the pendency

                                       7

<PAGE>

of any arbitration proceeding. This exclusion does not constitute a waiver of
the right or obligation of any party to submit any dispute to arbitration or
reference hereunder, including those arising from the exercise of the actions
detailed in sections (i), (ii) and (iii) of this paragraph.

         (d)      Arbitrator Qualifications and Powers. Any arbitration
proceeding in which the amount in controversy is $5,000,000 or less will be
decided by a single arbitrator selected according to the Rules, and who shall
not render an award of greater than $5,000,000. Any dispute in which the amount
in controversy exceeds $5,000,000 shall be decided by majority vote of a panel
of three arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations. The arbitrator will be a neutral
attorney licensed in the State of California or a neutral retired judge of the
state or federal judiciary of California, in either case with a minimum of ten
years experience in the substantive law applicable to the subject matter of the
dispute to be arbitrated. The arbitrator will determine whether or not an issue
is arbitratable and will give effect to the statutes of limitation in
determining any claim. In any arbitration proceeding the arbitrator will decide
(by documents only or with a hearing at the arbitrator's discretion) any
pre-hearing motions which are similar to motions to dismiss for failure to state
a claim or motions for summary adjudication. The arbitrator shall resolve all
disputes in accordance with the substantive law of California and may grant any
remedy or relief that a court of such state could order or grant within the
scope hereof and such ancillary relief as is necessary to make effective any
award. The arbitrator shall also have the power to award recovery of all costs
and fees, to impose sanctions and to take such other action as the arbitrator
deems necessary to the same extent a judge could pursuant to the Federal Rules
of Civil Procedure, the California Rules of Civil Procedure or other applicable
law. Judgment upon the award rendered by the arbitrator may be entered in any
court having jurisdiction. The institution and maintenance of an action for
judicial relief or pursuit of a provisional or ancillary remedy shall not
constitute a waiver of the right of any party, including the plaintiff, to
submit the controversy or claim to arbitration if any other party contests such
action for judicial relief.

         (e)      Discovery. In any arbitration proceeding discovery will be
permitted in accordance with the Rules. All discovery shall be expressly limited
to matters directly relevant to the dispute being arbitrated and must be
completed no later than 20 days before the hearing date and within 180 days of
the filing of the dispute with the AAA. Any requests for an extension of the
discovery periods, or any discovery disputes, will be subject to final
determination by the arbitrator upon a showing that the request for discovery is
essential for the party's presentation and that no alternative means for
obtaining information is available.

         (f)      Class Proceedings and Consolidations. The resolution of any
dispute arising pursuant to the terms of this Agreement shall be determined by a
separate arbitration proceeding and such dispute shall not be consolidated with
other disputes or included in any class proceeding.

         (g)      Payment Of Arbitration Costs And Fees. The arbitrator shall
award all costs and expenses of the arbitration proceeding.

         (h)      Real Property Collateral; Judicial Reference. Notwithstanding
anything herein to the contrary, no dispute shall be submitted to arbitration if
the dispute concerns indebtedness

                                       8

<PAGE>

secured directly or indirectly, in whole or in part, by any real property unless
(i) the holder of the mortgage, lien or security interest specifically elects in
writing to proceed with the arbitration, or (ii) all parties to the arbitration
waive any rights or benefits that might accrue to them by virtue of the single
action rule statute of California, thereby agreeing that all indebtedness and
obligations of the parties, and all mortgages, liens and security interests
securing such indebtedness and obligations, shall remain fully valid and
enforceable. If any such dispute is not submitted to arbitration, the dispute
shall be referred to a referee in accordance with California Code of Civil
Procedure Section 638 et seq., and this general reference agreement is intended
to be specifically enforceable in accordance with said Section 638. A referee
with the qualifications required herein for arbitrators shall be selected
pursuant to the AAA's selection procedures. Judgment upon the decision rendered
by a referee shall be entered in the court in which such proceeding was
commenced in accordance with California Code of Civil Procedure Sections 644 and
645.

         (i)      Miscellaneous. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business or by applicable law or
regulation. If more than one agreement for arbitration by or between the parties
potentially applies to a dispute, the arbitration provision most directly
related to the Loan Documents or the subject matter of the dispute shall
control. This arbitration provision shall survive termination, amendment or
expiration of any of the Loan Documents or any relationship between the parties.

                                       9

<PAGE>

         IN WITNESS WHEREOF, the Guarantor has executed this Subsidiary Guaranty
by its duly authorized officer as of the date first written above.

                                            VIRCO, INC.,
                                            a Delaware corporation

                                            By: /s/ Robert E. Dose
                                                ----------------------------
                                            Name: Robert E. Dose
                                            Title: VP Finance

                                                               Signature Page to
                                                  Virgo Inc. Subsidiary Guaranty

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.5
<SEQUENCE>7
<FILENAME>v96066exv99w5.txt
<DESCRIPTION>EXHIBIT 99.5
<TEXT>
<PAGE>

Exhibit 99.5

                          REVOLVING LINE OF CREDIT NOTE

$45,000,000                                              West Covina, California
                                                                January 27, 2004

         FOR VALUE RECEIVED, the undersigned VIRCO MFG. CORPORATION ("Borrower")
promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank")
at its office at San Gabriel Valley Regional Commercial Banking Office, 1000
Lakes Drive, Suite 250, West Covina, California, or at such other place as the
holder hereof may designate, in lawful money of the United States of America and
in immediately available funds, the principal sum of Forty Five Million Dollars
($45,000,000), or so much thereof as may be advanced and be outstanding, with
interest thereon, to be computed on each advance from the date of its
disbursement as set forth herein.

         This Revolving Line of Credit Note (this "Note") is the Line of Credit
Note issued pursuant to the Credit Agreement dated as of January 27, 2004 (as
amended, restated, supplemented or otherwise modified, the "Credit Agreement")
between Borrower and Bank. Terms defined in the Credit Agreement and not
otherwise defined herein are used herein as therein defined. Reference hereby is
made to the Loan Documents for a description of the assets in which a Lien has
been granted, the nature and extent of the security and the guaranties, the
terms and conditions upon which the Liens and each guaranty were granted and the
rights of the holder of this Note in respect thereof.

         DEFINITIONS:

         As used herein, the following terms shall have the meanings set forth
after each, and any other term defined in this Note shall have the meaning set
forth at the place defined:

         (a)      "Fixed Rate Term" means a period commencing on a Business Day
and continuing for one (1), two (2), three (3), six (6), nine (9) or twelve (12)
months, as designated by Borrower, during which all or a portion of the
outstanding principal balance of this Note bears interest determined in relation
to LIBOR; provided however, that no Fixed Rate Term may be selected for a
principal amount less than $1,000,000; and provided further, that no Fixed Rate
Term shall extend beyond the Line of Credit Termination Date. If any Fixed Rate
Term would end on a day which is not a Business Day, then such Fixed Rate Term
shall be extended to the next succeeding Business Day.

         (b)      "LIBOR" means the rate per annum (rounded upward, if
necessary, to the nearest whole 1/8 of 1%) and determined pursuant to the
following formula:

                                            Base LIBOR
                  LIBOR =  --------------------------------------------
                                    100% - LIBOR Reserve Percentage

                  (i)      "Base LIBOR" means the rate per annum for United
         States dollar deposits quoted by Bank as the Inter-Bank Market Offered
         Rate, with the understanding that such

                                       1

<PAGE>

         rate is quoted by Bank for the purpose of calculating effective rates
         of interest for loans making reference thereto, on the first day of a
         Fixed Rate Term for delivery of funds on said date for a period of time
         approximately equal to the number of days in such Fixed Rate Term and
         in an amount approximately equal to the principal amount to which such
         Fixed Rate Term applies. Borrower understands and agrees that Bank may
         base its quotation of the Inter-Bank Market Offered Rate upon such
         offers or other market indicators of the Inter-Bank Market as Bank in
         its discretion deems appropriate including, but not limited to, the
         rate offered for U.S. dollar deposits on the London Inter-Bank Market.

                  (ii)     "LIBOR Reserve Percentage" means the reserve
         percentage prescribed by the Board of Governors of the Federal Reserve
         System (or any successor) for "Eurocurrency Liabilities" (as defined in
         Regulation D of the Federal Reserve Board, as amended), adjusted by
         Bank for expected changes in such reserve percentage during the
         applicable Fixed Rate Term.

         (c)      "Prime Rate" means at any time the rate of interest most
recently announced within Bank at its principal office as its Prime Rate, with
the understanding that the Prime Rate is one of Bank's base rates and serves as
the basis upon which effective rates of interest are calculated for those loans
making reference thereto, and is evidenced by the recording thereof after its
announcement in such internal publication or publications as Bank may designate.

INTEREST:

         (a)      Interest. The outstanding principal balance of this Note shall
bear interest (computed on the basis of a 360-day year, actual days elapsed)
either (i) at a fluctuating rate per annum equal to the Prime Rate in effect
from time to time plus 0.50% or (ii) at a fixed rate per annum determined by
Bank equal to LIBOR in effect on the first day of the applicable Fixed Rate Term
plus 2.75%. When interest is determined in relation to the Prime Rate, each
change in the rate of interest hereunder shall become effective on the date each
Prime Rate change is announced within Bank. With respect to each LIBOR selection
hereunder, Bank is hereby authorized to note the date, principal amount,
interest rate and Fixed Rate Term applicable thereto and any payments made
thereon on Bank's books and records (either manually or by electronic entry)
and/or on any schedule attached to this Note, which notations shall be prima
facie evidence of the accuracy of the information noted.

         (b)      Selection of Interest Rate Options. At any time any portion of
this Note bears interest determined in relation to LIBOR, it may be continued by
Borrower at the end of the Fixed Rate Term applicable thereto so that all or a
portion thereof bears interest determined in relation to the Prime Rate or to
LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion
of this Note bears interest determined in relation to the Prime Rate, Borrower
may convert all or a portion thereof so that it bears interest determined in
relation to LIBOR for a Fixed Rate Term designated by Borrower. At such time as
Borrower requests an advance hereunder or wishes to select a LIBOR option for
all or a portion of the outstanding principal balance hereof, and at the end of
each Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the
interest rate option selected by Borrower; (ii) the principal amount subject
thereto; and (iii) for each LIBOR selection, the length of the applicable Fixed
Rate Term;

                                       2

<PAGE>

provided, however, that if an Event of Default has occurred and is continuing,
Borrower may not elect to continue or convert any Advance outstanding hereunder
into a LIBOR rate loan. Any such notice may be given by telephone (or such other
electronic method as Bank may permit) so long as, with respect to each LIBOR
selection, (A) if requested by Bank, Borrower provides to Bank written
confirmation thereof not later than three (3) Business Days after such notice is
given, and (B) such notice is given to Bank prior to 10:00 a.m. on the first day
of the Fixed Rate Term, or at a later time during any Business Day if Bank, at
it's sole option but without obligation to do so, accepts Borrower's notice and
quotes a fixed rate to Borrower. If Borrower does not immediately accept a fixed
rate when quoted by Bank, the quoted rate shall expire and any subsequent LIBOR
request from Borrower shall be subject to a redetermination by Bank of the
applicable fixed rate. If no specific designation of interest is made at the
time any advance is requested hereunder or at the end of any Fixed Rate Term,
Borrower shall be deemed to have made a Prime Rate interest selection for such
advance or the principal amount to which such Fixed Rate Term applied.

         (c)      Taxes and Regulatory Costs. Borrower shall pay to Bank
immediately upon demand, in addition to any other amounts due or to become due
hereunder, any and all (i) withholdings, interest equalization taxes, stamp
taxes or other taxes (except income and franchise taxes) imposed by any
Governmental Authority and related in any manner to LIBOR, and (ii) future,
supplemental, emergency or other changes in the LIBOR Reserve Percentage,
assessment rates imposed by the Federal Deposit Insurance Corporation, or
similar requirements or costs imposed by any Governmental Authority or resulting
from compliance by Bank with any request or directive (whether or not having the
force of law) from any central bank or other Governmental Authority and related
in any manner to LIBOR to the extent they are not included in the calculation of
LIBOR. In determining which of the foregoing are attributable to any LIBOR
option available to Borrower hereunder, any reasonable allocation made by Bank
among its operations shall be conclusive and binding upon Borrower.

         (d)      Payment of Interest. Interest accrued on this Note shall be
payable on the first day of each month, commencing February 1, 2004.

         (e)      Default Interest. From and after the maturity date of this
Note, or such earlier date as all principal owing hereunder becomes due and
payable by acceleration or otherwise, the outstanding principal balance of this
Note shall bear interest until paid in full at an increased rate per annum
(computed on the basis of a 360-day year, actual days elapsed) equal to four
percent (4%) above the rate of interest from time to time applicable to this
Note.

BORROWING AND REPAYMENT:

         (a)      Borrowing and Repayment. Borrower may from time to time during
the term of this Note borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions of this Note and of any document executed in connection with or
governing this Note; provided however, that the total outstanding borrowings
under this Note shall not at any time exceed the principal amount set forth
above or such lesser amount as shall at any time be available hereunder, as set
forth in the Credit Agreement. The unpaid principal balance of this obligation
at any time shall be the total amounts advanced hereunder by the holder hereof
less the amount of principal payments made hereon by or for any

                                       3

<PAGE>

Borrower, which balance may be endorsed hereon from time to time by the holder.
The outstanding principal balance of this Note shall be due and payable in full
on Line of Credit Termination Date.

         (b)      Advances. Advances hereunder, to the total amount of the
principal sum stated above, may be made by the holder at the oral or written
request of (i) Robert A. Virtue, Robert Dose, Doug Virtue or Bassey Yau, any one
of them acting alone, who are authorized to request Advances and direct the
disposition of any Advances until written notice of the revocation of such
authority is received by the holder at the office designated above, or (ii) any
person, with respect to Advances deposited to the credit of any deposit account
of Borrower, which advances, when so deposited, shall be conclusively presumed
to have been made to or for the benefit of Borrower regardless of the fact that
persons other than those authorized to request Advances may have authority to
draw against such account. The holder shall have no obligation to determine
whether any person requesting an Advance is or has been authorized by Borrower.

         (c)      Application of Payments. Each payment made on this Note shall
be credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be applied
first, to the outstanding principal balance of this Note which bears interest
determined in relation to the Prime Rate, if any, and second, to the outstanding
principal balance of this Note which bears interest determined in relation to
LIBOR, with such payments applied to the oldest Fixed Rate Term first.

PREPAYMENT:

         (a)      Prime Rate. Borrower may prepay principal on any portion of
this Note which bears interest determined in relation to the Prime Rate at any
time, in any amount and without penalty.

         (b)      LIBOR. Borrower may prepay principal on any portion of this
Note which bears interest determined in relation to LIBOR at any time and in the
minimum amount of $1,000,000; provided, however, that if the outstanding
principal balance of such portion of this Note is less than said amount, the
minimum prepayment amount shall be the entire outstanding principal balance
thereof. In consideration of Bank providing this prepayment option to Borrower,
or if any such portion of this Note shall become due and payable at any time
prior to the last day of the Fixed Rate Term applicable thereto by acceleration
or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is
the sum of the discounted monthly differences for each month from the month of
prepayment through the month in which such Fixed Rate Term matures, calculated
as follows for each such month:

                  (i)      Determine the amount of interest which would have
         accrued each month on the amount prepaid at the interest rate
         applicable to such amount had it remained outstanding until the last
         day of the Fixed Rate Term applicable thereto.

                  (ii)     Subtract from the amount determined in (i) above the
         amount of interest which would have accrued for the same month on the
         amount prepaid for the remaining term of such Fixed Rate Term at LIBOR
         in effect on the date of prepayment for new loans made for such term
         and in a principal amount equal to the amount prepaid.

                                       4

<PAGE>

                  (iii)    If the result obtained in (ii) for any month is
         greater than zero, discount that difference by LIBOR used in (ii)
         above.

         Borrower acknowledges that prepayment of such amount may result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Borrower, therefore, agrees to pay the above described prepayment
fee and agrees that said amount represents a reasonable estimate of the
prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay
any prepayment fee when due, the amount of such prepayment fee shall thereafter
bear interest until paid at a rate per annum two percent (2%) above the Prime
Rate in effect from time to time (computed on the basis of a 360 day year,
actual days elapsed). Each change in the rate of interest on any such past due
prepayment fee shall become effective on the date each Prime Rate change is
announced within Bank.

         (c)      The principal Indebtedness evidenced hereby shall be payable
as follows and without set off, counterclaim or reduction of any kind:

                  (i)      the amount, if any, by which the LC Usage Amount at
         any time exceeds the lesser of the Revolving Commitment or the
         Borrowing Base at such date shall be payable immediately; and

                  (ii)     the principal Indebtedness evidenced hereby shall be
         payable on the Line of Credit Termination Date

EVENTS OF DEFAULT:

         Any default in the payment or performance of any obligation under this
Note, or any defined event of default under the Credit Agreement, shall
constitute an "Event of Default" under this Note.

MISCELLANEOUS:

         (a)      Obligations Joint and Several. Should more than one person or
entity sign this Note as a Borrower, the obligations of each such Borrower shall
be joint and several.

         (b)      Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of California.

                            [Signature Page Follows]

                                       5

<PAGE>

         IN WITNESS WHEREOF, the undersigned has executed this Note as of the
date first written above.

                                              VIRCO MFG. CORPORATION

                                              By: /s/ Robert E. Dose
                                                  ---------------------------
                                              Name: Robert E. Dose
                                              Title: VP Finance

                                       6

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.6
<SEQUENCE>8
<FILENAME>v96066exv99w6.txt
<DESCRIPTION>EXHIBIT 99.6
<TEXT>
<PAGE>

EXHIBIT 99.6

                                    TERM NOTE

$12,500,000                                              West Covina, California
                                                                January 27, 2004

         FOR VALUE RECEIVED, the undersigned VIRCO MFG. CORPORATION ("Borrower")
promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank")
at its office at San Gabriel Valley Regional Commercial Banking Office, 1000
Lakes Drive, Suite 250, West Covina, California, or at such other place as the
holder hereof may designate, in lawful money of the United States of America and
in immediately available funds, the principal sum of $12,500,000, with interest
thereon as set forth herein.

         This Term Note (this "Note") is the Term Note issued pursuant to the
Credit Agreement dated as of January 27, 2004 (as amended, restated,
supplemented or otherwise modified, the "Credit Agreement") between Borrower and
Bank. Terms defined in the Credit Agreement and not otherwise defined herein are
used herein as therein defined. Reference hereby is made to the Loan Documents
for a description of the assets in which a Lien has been granted, the nature and
extent of the security and the guaranties, the terms and conditions upon which
the Liens and each guaranty were granted and the rights of the holder of this
Note in respect thereof.

DEFINITIONS:

         As used herein, the following terms shall have the meanings set forth
after each, and any other term defined in this Note shall have the meaning set
forth at the place defined:

         (a)      "Fixed Rate Term" means a period commencing on a Business Day
and continuing for one (1), two (2), three (3), six (6), nine (9) or twelve (12)
months, as designated by Borrower, during which all or a portion of the
outstanding principal balance of this Note bears interest determined in relation
to LIBOR; provided however, that no Fixed Rate Term may be selected for a
principal amount less than $1,000,000; and provided further, that no Fixed Rate
Term shall extend beyond the Term Loan Termination Date. If any Fixed Rate Term
would end on a day which is not a Business Day, then such Fixed Rate Term shall
be extended to the next succeeding Business Day.

         (b)      "LIBOR" means the rate per annum (rounded upward, if
necessary, to the nearest whole 1/8 of 1%) and determined pursuant to the
following formula:

                             Base LIBOR
         LIBOR =  --------------------------------------
                   100% - LIBOR Reserve Percentage

                  (i)      "Base LIBOR" means the rate per annum for United
         States dollar deposits quoted by Bank as the Inter-Bank Market Offered
         Rate, with the understanding that such rate is quoted by Bank for the
         purpose of calculating effective rates of interest for loans making
         reference thereto, on the first day of a Fixed Rate Term for delivery
         of funds on

                                       1

<PAGE>

         said date for a period of time approximately equal to the number of
         days in such Fixed Rate Term and in an amount approximately equal to
         the principal amount to which such Fixed Rate Term applies. Borrower
         understands and agrees that Bank may base its quotation of the
         Inter-Bank Market Offered Rate upon such offers or other market
         indicators of the Inter-Bank Market as Bank in its discretion deems
         appropriate including, but not limited to, the rate offered for U.S.
         dollar deposits on the London Inter-Bank Market.

                  (ii)     "LIBOR Reserve Percentage" means the reserve
         percentage prescribed by the Board of Governors of the Federal Reserve
         System (or any successor) for "Eurocurrency Liabilities" (as defined in
         Regulation D of the Federal Reserve Board, as amended), adjusted by
         Bank for expected changes in such reserve percentage during the
         applicable Fixed Rate Term.

         (c)      "Prime Rate" means at any time the rate of interest most
recently announced within Bank at its principal office as its Prime Rate, with
the understanding that the Prime Rate is one of Bank's base rates and serves as
the basis upon which effective rates of interest are calculated for those loans
making reference thereto, and is evidenced by the recording thereof after its
announcement in such internal publication or publications as Bank may designate.

INTEREST:

         (a)      Interest. The outstanding principal balance of this Note shall
bear interest (computed on the basis of a 360-day year, actual days elapsed)
either at a (i) fluctuating rate per annum equal to the Prime Rate in effect
from time to time plus 0.75%, or (ii) at a fixed rate per annum determined by
Bank equal to LIBOR in effect on the first day of the applicable Fixed Rate Term
plus 3.25%. When interest is determined in relation to the Prime Rate, each
change in the rate of interest hereunder shall become effective on the date each
Prime Rate change is announced within Bank. With respect to each LIBOR selection
hereunder, Bank is hereby authorized to note the date, principal amount,
interest rate and Fixed Rate Term applicable thereto and any payments made
thereon on Bank's books and records (either manually or by electronic entry)
and/or on any schedule attached to this Note, which notations shall be prima
facie evidence of the accuracy of the information noted.

         (b)      Selection of Interest Rate Options. At any time any portion of
this Note bears interest determined in relation to LIBOR, it may be continued by
Borrower at the end the Fixed Rate Term applicable thereto so that all or a
portion thereof bears interest determined in relation to the Prime Rate or to
LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion
of this Note bears interest determined in relation to the Prime Rate, Borrower
may convert all or a portion thereof so that it bears interest determined in
relation to LIBOR for a Fixed Rate Term designated by Borrower. At the time this
Note is disbursed or Borrower wishes to select a LIBOR option for all or a
portion of the outstanding principal balance hereof, and at the end of each
Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the interest
rate option selected by Borrower; (ii) the principal amount subject thereto; and
(iii) for each LIBOR selection, the length of the applicable Fixed Rate Term;
provided, however, that if an Event of Default has occurred and is continuing,
Borrower may not elect to continue or convert any portion of the Term Loan
outstanding hereunder into a LIBOR rate loan. Any such notice

                                       2

<PAGE>

may be given by telephone (or such other electronic method as Bank may permit)
so long as, with respect to each LIBOR selection, (A) if requested by Bank,
Borrower provides to Bank written confirmation thereof not later than three (3)
Business Days after such notice is given, and (B) such notice is given to Bank
prior to 10:00 a.m. on the first day of the Fixed Rate Term, or at a later time
during any Business Day if Bank, at it's sole option but without obligation to
do so, accepts Borrower's notice and quotes a fixed rate to Borrower. If
Borrower does not immediately accept a fixed rate when quoted by Bank, the
quoted rate shall expire and any subsequent LIBOR request from Borrower shall be
subject to a redetermination by Bank of the applicable fixed rate. If no
specific designation of interest is made at the time this Note is disbursed or
at the end of any Fixed Rate Term, Borrower shall be deemed to have made a Prime
Rate interest selection for this Note or the principal amount to which such
Fixed Rate Term applied.

         (c)      Taxes and Regulatory Costs. Borrower shall pay to Bank
immediately upon demand, in addition to any other amounts due or to become due
hereunder, any and all (i) withholdings, interest equalization taxes, stamp
taxes or other taxes (except income and franchise taxes) imposed by any
Governmental Authority and related in any manner to LIBOR, and (ii) future,
supplemental, emergency or other changes in the LIBOR Reserve Percentage,
assessment rates imposed by the Federal Deposit Insurance Corporation, or
similar requirements or costs imposed by any Governmental Authority or resulting
from compliance by Bank with any request or directive (whether or not having the
force of law) from any central bank or other Governmental Authority and related
in any manner to LIBOR to the extent they are not included in the calculation of
LIBOR. In determining which of the foregoing are attributable to any LIBOR
option available to Borrower hereunder, any reasonable allocation made by Bank
among its operations shall be conclusive and binding upon Borrower.

         (d)      Payment of Interest. Interest accrued on this Note shall be
payable on the first day of each month, commencing February 1, 2004.

         (e)      Default Interest. From and after the maturity date of this
Note, or such earlier date as all principal owing hereunder becomes due and
payable by acceleration or otherwise, the outstanding principal balance of this
Note shall bear interest until paid in full at an increased rate per annum
(computed on the basis of a 360 day year, actual days elapsed) equal to four
percent (4%) above the rate of interest from time to time applicable to this
Note.

REPAYMENT AND PREPAYMENT:

         (a)      Repayment. The Term Loan evidenced hereby shall be payable as
follows and without set off, counterclaim or reduction of any kind:

                  (i)      an installment of principal equal to $520,833.34
         shall be due and payable on each January 31, April 30, July 31 and
         October 31 of each year, commencing on April 30, 2004;

                  (ii)     on the date of the consummation of any disposition of
         any assets of Borrower or any of its Subsidiaries (other than a
         disposition permitted by Section 5.6 of the Credit Agreement), an
         amount of the cash proceeds received in connection such

                                       3

<PAGE>

         disposition equal to the excess, if any, of the aggregate cash proceeds
         received in connection with all dispositions of assets (other than
         those permitted by Section 5.6 of the Credit Agreement) less (A) any
         fees, costs, commissions and expenses reasonably incurred in connection
         with such dispositions and (B) the taxes actually paid or to be payable
         by Borrower (as estimated by the chief financial officer of Borrower,
         giving effect to the overall tax position of Borrower), over $500,000,
         shall be payable in respect of the Indebtedness evidenced hereby; such
         payment shall be applied in the inverse order of the maturities due
         hereunder (and, Borrower acknowledges that nothing contained in this
         subclause (ii) shall permit Borrower or any of its Subsidiaries to sell
         or otherwise dispose of any assets other than in accordance with
         Section 5.6 of the Credit Agreement); and

                  (iii)    the principal Indebtedness evidenced hereby shall be
         payable on the Term Loan Termination Date.

         (b)      Application of Payments. Each payment made on this Note shall
be credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be applied
first, to the outstanding principal balance of this Note which bears interest
determined in relation to the Prime Rate, if any, and second, to the outstanding
principal balance of this Note which bears interest determined in relation to
LIBOR, with such payments applied to the oldest Fixed Rate Term first.

         (c)      Prepayment.

         Prime Rate. Borrower may prepay principal on any portion of this Note
which bears interest determined in relation to the Prime Rate at any time, in
any amount and without penalty. Any such prepayment shall be applied in the
inverse order of the maturities due hereunder.

         LIBOR. Borrower may prepay principal on any portion of this Note which
bears interest determined in relation to LIBOR at any time and in the minimum
amount of $1,000,000; provided however, that if the outstanding principal
balance of such portion of this Note is less than said amount, the minimum
prepayment amount shall be the entire outstanding principal balance thereof. In
consideration of Bank providing this prepayment option to Borrower, or if any
such portion of this Note shall become due and payable at any time prior to the
last day of the Fixed Rate Term applicable thereto by acceleration or otherwise,
Borrower shall pay to Bank immediately upon demand a fee which is the sum of the
discounted monthly differences for each month from the month of prepayment
through the month in which such Fixed Rate Term matures, calculated as follows
for each such month:

                  (i)      Determine the amount of interest which would have
         accrued each month on the amount prepaid at the interest rate
         applicable to such amount had it remained outstanding until the last
         day of the Fixed Rate Term applicable thereto.

                  (ii)     Subtract from the amount determined in (i) above the
         amount of interest which would have accrued for the same month on the
         amount prepaid for the remaining term of such Fixed Rate Term at LIBOR
         in effect on the date of prepayment for new loans made for such term
         and in a principal amount equal to the amount prepaid.

                                       4

<PAGE>

                  (iii)    If the result obtained in (ii) for any month is
         greater than zero, discount that difference by LIBOR used in (ii)
         above.

         Borrower acknowledges that prepayment of such amount may result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Borrower, therefore, agrees to pay the above described prepayment
fee and agrees that said amount represents a reasonable estimate of the
prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay
any prepayment fee when due, the amount of such prepayment fee shall thereafter
bear interest until paid at a rate per annum two percent (2%) above the Prime
Rate in effect from time to time (computed on the basis of a 360 day year,
actual days elapsed). Each change in the rate of interest on any such past due
prepayment fee shall become effective on the date each Prime Rate change is
announced within Bank.

         All prepayments of principal shall be applied on the most remote
principal installment or installments then unpaid.

EVENTS OF DEFAULT:

         Any default in the payment or performance of any obligation under this
Note, or any defined Event of Default under the Credit Agreement, shall
constitute an "Event of Default" under this Note.

MISCELLANEOUS:

         (a)      Obligations Joint and Several. Should more than one person or
entity sign this Note as a Borrower, the obligations of each such Borrower shall
be joint and several.

         (b)      Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of California.

                            [Signature Page Follows]

                                       5

<PAGE>

         IN WITNESS WHEREOF, the undersigned has executed this Note as of the
date first written above.
                                   VIRCO MFG. CORPORATION

                                   By: /s/ Robert E. Dose
                                       ----------------------------------
                                       Robert E. Dose
                                       Vice President - Finance, Secretary and
                                       Treasurer

                                       6

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.7
<SEQUENCE>9
<FILENAME>v96066exv99w7.txt
<DESCRIPTION>EXHIBIT 99.7
<TEXT>
<PAGE>

                                                                  EXECUTION COPY

EXHIBIT 99.7

                              AMENDED AND RESTATED
                               SECURITY AGREEMENT

                  AMENDED AND RESTATED SECURITY AGREEMENT dated as of January
27, 2004 among VIRCO MFG. CORPORATION, a Delaware corporation (the "PARENT"),
each of the Parent's Subsidiaries signatory hereto (such Subsidiaries, the
"SUBSIDIARY GUARANTORS"; and together with the Parent are referred to herein as
the "GRANTORS"), and WELLS FARGO BANK, NATIONAL ASSOCIATION (the "BANK").

                               W I T N E S S T H:

                  WHEREAS, pursuant to the Credit Agreement dated as of January
27, 2004 (as amended, restated, supplemented or otherwise modified , the "CREDIT
AGREEMENT") between the Parent and the Bank, the Bank has agreed to made certain
loans and other financial accommodations to the Parent;

                  WHEREAS, as a condition to the Bank's obligation to extend
such loans and other financial accommodations the Subsidiary Guarantors have
agreed to guaranty the Parent's obligations under the Credit Agreement and the
other Loan Documents to which the Company is party; and

                  WHEREAS, as a further condition to the Bank's obligation to
extend such loans and other financial accommodations, the Bank has required, and
the Grantors have agreed, to (i) execute and deliver this Security Agreement to
provide collateral security for the obligation of the Grantors under the Loan
Documents to which each is party and (ii) amend, restate and consolidate the
Continuing Security Agreement: Rights to Payment and Inventory dated as of
February 1, 2003 between the Company and the Bank and the Security Agreement:
Equipment dated as of February 1, 2003 (collectively, the "PRIOR SECURITY
DOCUMENTS") between the Company and the Bank in the form set forth herein.

                  NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:

                  1.       DEFINED TERMS. Terms defined in the Credit Agreement
and not otherwise defined in Annex A hereto are used herein as therein defined.
All other terms contained in this Security Agreement, unless the context
indicates otherwise, have the meanings provided for by the Code to the extent
the same are used or defined therein.

                  2.       GRANT OF LIEN.

                  (a)      To secure the prompt and complete payment,
performance and observance of all of its Secured Obligations, each Grantor
hereby grants, assigns, conveys, mortgages, pledges, hypothecates and transfers
to the Bank, a security interest in and Lien upon all of its right, title and
interest in, to and under all personal property and other assets, whether now
owned

                                                              Security Agreement

<PAGE>

by or owing to, or hereafter acquired by or arising in favor of such Grantor
(including under any trade names, styles or derivations thereof), and whether
owned or consigned by or to, or leased from or to, such Grantor, and regardless
of where located (all of which being hereinafter collectively referred to as the
"COLLATERAL"), including:

                           (i)      all Accounts;

                           (ii)     all Chattel Paper;

                           (iii)    all Documents;

                           (iv)     all General Intangibles (including payment
         intangibles and Software);

                           (v)      all Goods (including Inventory, Equipment
         and Fixtures);

                           (vi)     all Instruments;

                           (vii)    all Investment Property;

                           (viii)   all Deposit Accounts of such Grantor,
         including all deposits therein;

                           (ix)     all money, cash or cash equivalents of such
         Grantor;

                           (x)      all Supporting Obligations and
         Letter-of-Credit Rights of such Grantor; and

                           (xi)     to the extent not otherwise included, all
         Proceeds, tort claims, insurance claims and other rights to payments
         not otherwise included in the foregoing and products of the foregoing
         and all accessions to, substitutions and replacements for, and rents
         and profits of, each of the foregoing.

                  (b)      In addition, to secure the prompt and complete
payment, performance and observance of the Secured Obligations and in order to
induce the Bank as aforesaid, each Grantor hereby grants to the Bank, a right of
setoff against the property of such Grantor held by the Bank, consisting of
property described above in Section 2(a) now or hereafter in the possession or
custody of or in transit to the Bank, for any purpose, including safekeeping,
collection or pledge, for the account of such Grantor, or as to which such
Grantor may have any right or power.

                  3.       RIGHTS: LIMITATIONS ON THE BANK'S OBLIGATIONS.

                  (a)      It is expressly agreed by the Grantors that, anything
herein to the contrary notwithstanding, each Grantor shall remain liable under
each of its Contracts and each of its Licenses to observe and perform all the
conditions and obligations to be observed and performed by it thereunder. The
Bank shall not have any obligation or liability under any Contract or License by
reason of or arising out of this Security Agreement or the granting herein of a
Lien
                                                              Security Agreement

                                       2

<PAGE>

thereon or the receipt by the Bank of any payment relating to any Contract or
License pursuant hereto. The Bank shall not be required or obligated in any
manner to perform or fulfill any of the obligations of any Grantor under or
pursuant to any Contract or License, or to make any payment, or to make any
inquiry as to the nature or the sufficiency of any payment received by it or the
sufficiency of any performance by any party under any Contract or License, or to
present or file any claims, or to take any action to collect or enforce any
performance or the payment of any amounts which may have been assigned to it or
to which it may be entitled at any time or times.

                  (b)      The Bank may at any time after an Event of Default
has occurred and be continuing (or, if any rights of set-off (other than
set-offs against an Account arising under the Contract giving rise to the same
Account) or contra accounts may be asserted with respect to the following),
without prior notice to any Grantor, notify Account Debtors and other Persons
obligated on the Collateral that the Bank has a security interest therein, and
that payments shall be made directly to the Bank. Upon the request of the Bank,
each Grantor shall so notify Account Debtors and other Persons obligated on
Collateral. Once any such notice has been given to any Account Debtor or other
Person obligated on the Collateral, the affected Grantor shall not give any
contrary instructions to such Account Debtor or other Person without the Bank's
prior written consent.

                  (c)      The Bank may at any time in the Bank's own name, in
the name of a nominee of the Bank or in the name of any Grantor communicate with
Account Debtors, parties to Contracts and obligors in respect of Instruments to
verify with such Persons, to the Bank's satisfaction, the existence, amount
terms of, and any other matter relating to, Accounts, payment intangibles,
Instruments or Chattel Paper.

                  4.       REPRESENTATIONS AND WARRANTIES. Each Grantor
represents and warrants that:

                  (a)      Each Grantor has rights in and the power to transfer
each item of the Collateral upon which it purports to grant a Lien hereunder
free and clear of any and all Liens other than Permitted Liens.

                  (b)      No effective security agreement, financing statement,
equivalent security or Lien instrument or continuation statement covering all or
any part of the Collateral is on file or of record in any public office, except
such as may have been filed (i) by any Grantor in favor of the Bank pursuant to
this Security Agreement; and (ii) in connection with any other Permitted Liens.

                  (c)      This Security Agreement is effective to create a
valid and continuing Lien on and, upon the filing of appropriate financing
statements with the governmental offices listed on Schedule I hereto, a
perfected Lien in favor of the Bank on the Collateral with respect to which a
Lien may be perfected by filing pursuant to the Code. Such Lien is prior to all
other Liens, except the Permitted Liens that would be prior to Liens in favor of
the Bank as a matter of law, and is enforceable as such as against any and all
creditors of and purchasers from any Grantor (other than purchasers and lessees
of Inventory in the ordinary course of business and non-exclusive licensees of
General Intangibles in the ordinary course of business). All action by

                                                              Security Agreement

                                       3

<PAGE>

any Grantor necessary or desirable to protect and perfect such Lien on each item
of the Collateral has been duly taken.

                  (d)      Schedule II hereto lists, as of the Closing Date, all
Instruments, Letter of Credit Rights and Chattel Paper of each Grantor. All
action by any Grantor necessary or desirable to protect and perfect the Lien of
the Bank on each item set forth on Schedule II (including the delivery of all
originals thereof to the Bank and the legending of all Chattel Paper as required
by Section 5(b) hereof) has been duly taken. The Lien of the Bank on the
Collateral listed on Schedule II hereto is prior to all other Liens, except the
Permitted Liens that would be prior to the Liens in favor of the Bank as a
matter of law, and is enforceable as such against any and all creditors of and
purchasers from any Grantor.

                  (e)      Each Grantor's name as it appears in official filings
in its jurisdiction of organization, the type of entity of each Grantor
(including corporation, partnership, limited partnership or limited liability
company), any other registered, trade or fictious names of such Grantor, the
organizational identification number issued to such Grantor by its jurisdiction
of organization or a statement that no such number has been issued, such
Grantor's jurisdiction of organization, the location of such Grantor's chief
executive office, principal place of business, offices, all warehouses and
premises where Collateral is stored or located, and the locations of its books
and records concerning the Collateral, in each case for the last five (5) years
are set forth on Schedule III hereto. Each Grantor has only one state of
incorporation or organization.

                  (f)      With respect to the Accounts (i) they represent bona
fide sales of Inventory or rendering of services to Account Debtors in the
ordinary course of each Grantor's business and are not evidenced by a judgment,
Instrument or Chattel Paper; (ii) there are no setoffs, claims or disputes
existing or asserted with respect thereto and no Grantor has made any agreement
with any Account Debtor for any extension of time for the payment thereof, any
compromise or settlement for less than the full amount thereof, any release of
any Account Debtor from liability therefor, or any deduction therefrom except a
discount or allowance allowed by such Grantor in the ordinary course of its
business for prompt payment and disclosed to the Bank; (iii) to each Grantor's
knowledge, there are no facts, events or occurrences which in any way impair the
validity or enforceability thereof or could reasonably be expected to reduce the
amount payable thereunder as shown on any Grantor's books and records and any
invoices and statements delivered to the Bank with respect thereto; (iv) that
are Eligible Accounts, no Grantor has received any notice of proceedings or
actions which are threatened or pending against any Account Debtor on such
Eligible Accounts which might result in any adverse change in such Account
Debtor's financial condition; and (v) no Grantor has knowledge that any Account
Debtor is unable generally to pay its debts as they become due. Further with
respect to the Accounts (x) the amounts shown on all invoices and statements
which may be delivered to the Bank with respect thereto are actually and
absolutely owing to such Grantor as indicated thereon and are not in any way
contingent; and (y) to each Grantor's knowledge, all Account Debtors have the
capacity to contract.

                  (g)      With respect to any Inventory of the Grantors (i)
such Inventory is located at one of the applicable Grantor's locations set forth
on Schedule III hereto; (ii) no Inventory is now, or shall at any time or times
hereafter be stored at any other location without the Bank's

                                                              Security Agreement

                                        4

<PAGE>

prior consent, and if the Bank gives such consent, the applicable Grantor will
concurrently therewith obtain a bailee, landlord and mortgagee agreement with
respect to such location; (iii) the applicable Grantor has good, indefeasible
and merchantable title to such Inventory and such Inventory are not subject to
any Lien or security interest or document whatsoever except for the Lien granted
to the Bank, and except for Permitted Liens; (iv) except as disclosed to Bank in
writing, such Inventory is not subject to any licensing, Patent, royalty,
Trademark, trade name or Copyright agreements with any third parties which would
require any consent of any third party upon sale or disposition of that
Inventory or the payment of any monies to any third party upon such sale or
other disposition; and (v) the disposition of such Inventory by the Bank
following an Event of Default shall not require the consent of any Person and
shall not constitute a breach or default under any contract or agreement to
which any Grantor is a party or to which such property is subject.

                  (h)      As of the Closing Date, no Grantor has any interest
in, or title to, any Patent, Trademark or Copyright except as set forth in
Schedule IV hereto. This Security Agreement is effective to create a valid and
continuing Lien on and, upon filing of appropriate financing statements with the
governmental offices listed on Schedule I hereto and an Intellectual Property
Security Agreement with the United States Copyright Office or the United States
Patent and Trademark Office, as the case may be, perfected Liens in favor of the
Bank on each Grantor' s Patents, Trademarks and Copyrights and such perfected
Liens are enforceable as such as against any and all creditors of and purchasers
from any Grantor. Upon filing of an Intellectual Property Security Agreement
with the United States Copyright Office or the United States Patent and
Trademark Office, as the case may be, and the filing of appropriate financing
statements listed on Schedule I hereto, all action necessary or desirable to
protect and perfect the Bank's Lien on each Grantor's Patents, Trademarks or
Copyrights shall have been duly taken.

                  (i)      (i)      Other than as described on Schedule V, there
are no subscriptions, options, warrants, or calls relating to any shares of the
capital stock of the Parent, including any right of conversion or exchange under
any outstanding security or other instrument. The Parent is not subject to any
obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire any shares of its capital stock or any security convertible into or
exchangeable for any of its capital stock or other Equity Interests.

                           (ii)     Schedule V hereto lists a complete and
accurate list of the Parent's direct and indirect Subsidiaries, showing: (i) the
jurisdiction of their organization; (ii) the number of shares of each class of
capital stock authorized for each of such Subsidiaries; and (iii) the number and
the percentage of the outstanding shares of each such class owned directly or
indirectly by the Parent. All of the outstanding capital stock of each such
Subsidiary has been validly issued and is fully paid and nonassessable.

                           (iii)    Except as set forth on Schedule V, no
capital stock (or any securities, instruments, warrants, options, purchase
rights, conversion or exchange rights, calls, commitments or claims of any
character convertible into or exercisable for capital stock) of any direct or
indirect Subsidiary of the Parent is subject to the issuance of any security,
instrument, warrant, option, purchase right, conversion or exchange right, call,
put, commitment or claim of any right, title, or interest therein or thereto.

                                                              Security Agreement

                                        5

<PAGE>

                  (j)      All Deposit Accounts of each Grantor are listed on
Schedule VI, including, with respect to each depository (i) the name and address
of such depository and (ii) the account numbers of the accounts maintained with
such depository.

                  5.       COVENANTS. Each Grantor covenants and agrees with the
Bank that from and after the date of this Security Agreement and until the
Termination Date:

                  (a)      Further Assurances: Pledge of Instruments; Chattel
Paper.

                           (i)      At any time and from time to time, upon the
         written request of the Bank and at the sole expense of Grantors, each
         Grantor shall promptly and duly execute and deliver any and all such
         further instruments and documents and take such further actions as the
         Bank may deem desirable to obtain the full benefits of this Security
         Agreement and of the rights and powers herein granted, including (A)
         using its best efforts to secure all consents and approvals necessary
         or appropriate for the assignment to or for the benefit of the Bank of
         any License or Contract held by such Grantor and to enforce the
         security interests granted hereunder; and (B) filing any financing or
         continuation statements under the Code with respect to the Liens
         granted hereunder or under any other Loan Document as to those
         jurisdictions that are not Uniform Commercial Code jurisdictions.

                           (ii)     Unless the Bank shall otherwise consent in
         writing (which consent may be revoked), each Grantor shall deliver to
         the Bank all Collateral consisting of negotiable Documents,
         certificated securities, Chattel Paper and Instruments (in each case,
         accompanied by stock powers, allonges or other instruments of transfer
         executed in blank) promptly after such Grantor receives the same.

                           (iii)    Each Grantor shall obtain or use its best
         efforts to obtain waivers or subordinations of Liens from landlords and
         mortgagees, and each Grantor shall in all instances obtain
         authenticated acknowledgements of the Bank's Liens from bailees having
         possession of any Grantor's Goods that they hold for the benefit of the
         Bank.

                           (iv)     Unless waived by the Bank in writing (which
         waiver may be revoked), each Grantor shall obtain authenticated
         Investment Property Control Agreements from each issuer of
         uncertificated securities, securities intermediary, or commodities
         intermediary issuing or holding any financial assets or commodities to
         or for any Grantor.

                           (v)      Unless waived by the Bank in writing (which
         waiver may be revoked), each Grantor shall obtain a Deposit Account
         Control Agreement with each bank or financial institution holding a
         Deposit Account for such Grantor.

                           (vi)     Each Grantor that is or becomes the
         beneficiary of a letter of credit shall, promptly, and in any event
         within two (2) Business Days after becoming a beneficiary, notify the
         Bank thereof and (i) if so requested by the Bank, use their best
         efforts to (and, if the face amount of the Letter-of-Credit Right
         exceeds $100,000 shall)

                                                              Security Agreement

                                        6

<PAGE>

         enter into a tri-party agreement with the Bank and the issuer and/or
         confirmation bank with respect to Letter-of-Credit Rights assigning
         such Letter-of-Credit Rights to the Bank.

                           (vii)    Each Grantor shall take all steps necessary
         to grant the Bank control of all electronic chattel paper in accordance
         with the Code.

                           (viii)   Each Grantor hereby irrevocably authorizes
         the Bank at any time and from time to time to file in any filing office
         in any Uniform Commercial Code jurisdiction any initial financing
         statements and amendments thereto that (a) indicate the Collateral (i)
         as all assets of such Grantor or words of similar effect, regardless of
         whether any particular asset comprised in the Collateral falls within
         the scope of Article 9 of the Code or such jurisdiction, or (ii) as
         being of an equal or lesser scope or with greater detail, and (b)
         contain any other information required by part 5 of Article 9 of the
         Code for the sufficiency or filing office acceptance of any financing
         statement or amendment, including (i) whether such Grantor is an
         organization, the type of organization and any organization
         identification number issued to such Grantor, and (ii) in the case of a
         financing statement filed as a fixture filing or indicating Collateral
         as as-extracted collateral or timber to be cut, a sufficient
         description of real property to which the Collateral relates. Each
         Grantor agrees to furnish any such information to the Bank promptly
         upon request. Each Grantor also ratifies its authorization for the Bank
         to have filed in any Uniform Commercial Code jurisdiction any initial
         financing statements or amendments thereto if filed prior to the date
         hereof.

                           (ix)     Each Grantor shall promptly, and in any
         event within two (2) Business Days after the same is acquired by it,
         notify the Bank of any commercial tort claim (as defined in the Code)
         acquired by it and unless otherwise consented to by the Bank (which may
         be revoked), such Grantor shall enter into a supplement to this
         Security Agreement, granting to the Bank a Lien in such commercial tort
         claim.

                  (b)      Maintenance of Records. The Grantors shall keep and
maintain, at their own cost and expense, satisfactory and complete records of
the Collateral, including a record of any and all payments received and any and
all credits granted with respect to the Collateral and all other dealings with
the Collateral. The Grantors shall mark their books and records pertaining to
the Collateral to evidence this Security Agreement and the Liens granted hereby.
If any Grantor retains possession of any Chattel Paper or Instruments with the
Bank's consent, such Chattel Paper and Instruments shall be marked with a legend
the form, scope and substance of which is acceptable to the Bank.

                  (c)      Covenants Regarding Patent, Trademark and Copyright
Collateral.

                           (i)      Grantors shall notify the Bank immediately
         if they know or have reason to know that any application or
         registration relating to any Patent, Trademark or Copyright (now or
         hereafter existing) may become abandoned or dedicated, or of any
         adverse determination or development (including the institution of, or
         any such determination or development in, any proceeding in the United
         States Patent and Trademark Office, the United States Copyright Office
         or any court) regarding any

                                                              Security Agreement

                                        7

<PAGE>

         Grantor's ownership of any Patent, Trademark or Copyright, its right to
         register the same, or to keep and maintain the same.

                           (ii)     In the event any Grantor, either itself or
         through any agent, employee, licensee or designee, files an application
         for the registration of any Patent, Trademark or Copyright with the
         United States Patent and Trademark Office, the United States Copyright
         Office or any similar office or agency then the relevant Grantor shall,
         within 45 days of the filing of such application notify, the Bank of
         such application, and, upon request of the Bank, Grantor shall execute
         and deliver any and all applicable Intellectual Property Security
         Agreements as the Bank may request to evidence the Bank's Lien on such
         Patent, Trademark or Copyright, and the General Intangibles of such
         Grantor relating thereto or represented thereby.

                           (iii)    Grantors shall take all actions necessary or
         requested by the Bank to maintain and pursue each application, to
         obtain the relevant registration and to maintain the registration of
         each of the Patents, Trademarks and Copyrights (now or hereafter
         existing), including the filing of applications for renewal, affidavits
         of use, affidavits of noncontestability and opposition and interference
         and cancellation proceedings, unless the applicable Grantor shall
         determine that such Patent, Trademark or Copyright is not material to
         the conduct of its business.

                           (iv)     In the event that any of the Patent,
         Trademark or Copyright Collateral is infringed upon, or misappropriated
         or diluted by a third party, such Grantor shall comply with Section
         5(a)(ix) of this Security Agreement. Such Grantor shall, unless such
         Grantor shall reasonably determine that such Patent, Trademark or
         Copyright Collateral is in no way material to the conduct of its
         business or operations, promptly sue for infringement, misappropriation
         or dilution and to recover any and all damages for such infringement,
         misappropriation or dilution, and shall take such other actions as the
         Bank shall deem appropriate under the circumstances to protect such
         Patent, Trademark or Copyright Collateral.

                  (d)      Indemnification. In any suit, proceeding or action
brought by the Bank relating to any Collateral for any sum owing with respect
thereto or to enforce any rights or claims with respect thereto, each Grantor
will save, indemnify and keep the Bank harmless from and against all expense
(including reasonable attorneys' fees and expenses), loss or damage suffered by
reason of any defense, setoff, counterclaim, recoupment or reduction of
liability whatsoever of the Account Debtor or other Person obligated on the
Collateral, arising out of a breach by any Grantor of any obligation thereunder
or arising out of any other agreement, indebtedness or liability at any time
owing to, or in favor of, such obligor or its successors from such Grantor,
except in the case of the Bank, to the extent such expense, loss, or damage is
attributable solely to the gross negligence or willful misconduct of the Bank as
finally determined by a court of competent jurisdiction. All such obligations of
Grantors shall be and remain enforceable against and only against Grantors and
shall not be enforceable against the Bank.

                                                              Security Agreement

                                        8

<PAGE>

                  (e)      Compliance with Terms of Accounts, etc. In all
material respects, each Grantor will perform and comply with all obligations in
respect of the Collateral and all other agreements to which it is a party or by
which it is bound relating to the Collateral.

                  (f)      Limitation on Liens on Collateral. No Grantor will
create, permit or suffer to exist, and each Grantor will defend the Collateral
against, and take such other action as is necessary to remove, any Lien on the
Collateral except Permitted Liens, and will defend the right, title and interest
of the Bank in and to any of such Grantor's rights under the Collateral against
the claims and demands of all Persons whomsoever.

                  (g)      Limitations on Disposition. No Grantor will sell,
license, lease, transfer or otherwise dispose of any of the Collateral, or
attempt or contract to do so except as permitted by the Credit Agreement.

                  (h)      Further Identification of Collateral. The Grantors
will, if so requested by the Bank, furnish to the Bank, as often as the Bank
requests, statements and schedules further identifying and describing the
Collateral and such other reports in connection with the Collateral as the Bank
may reasonably request, all in such detail as the Bank may specify.

                  (i)      Notices. Grantors will advise the Bank promptly, in
reasonable detail, (i) of any Lien (other than Permitted Liens) or written claim
made or asserted against any of the Collateral, and (ii) of the occurrence of
any other event which would have a material adverse effect on the aggregate
value of the Collateral or on the Liens created hereunder or under any other
Security Document.

                  (j)      No Reincorporation; No Name Change. No Grantor shall
reincorporate or reorganize itself under the laws of any jurisdiction other than
the jurisdiction in which it is incorporated or organized as of the date hereof
without the prior written consent of the Bank. No Grantor shall change its legal
name without first giving 30 days prior written notice of its intent to do so to
the Bank.

                  (k)      Terminations; Amendments Not Authorized. Each Grantor
acknowledges that it is not authorized to file any financing statement or
amendment or termination statement with respect to any financing statement
without the prior written consent of the Bank and agrees that it will not do so
without the prior written consent of the Bank, subject to such Grantor's rights
under Section 9-509(d)(2) of the Code.

                  6.       AGENT'S APPOINTMENT AS ATTORNEY-IN-FACT.

                  On the Closing Date each Grantor shall execute and deliver to
the Bank a power of attorney (the "Power of Attorney") substantially in the form
attached hereto as Exhibit A. The power of attorney granted pursuant to the
Power of Attorney is a power coupled with an interest and shall be irrevocable
until the Termination Date. The powers conferred on the Bank under the Power of
Attorney are solely to protect the Bank's interests in the Collateral and shall
not impose any duty upon the Bank to exercise any such powers. The Bank agrees
that (a) except for the powers granted in clause (h) of the Power of Attorney,
it shall not exercise any power or

                                                              Security Agreement

                                        9

<PAGE>

authority granted under the Power of Attorney unless an Event of Default has
occurred and is continuing, and (b) the Bank shall account for any moneys
received by the Bank in respect of any foreclosure on or disposition of
Collateral pursuant to the Power of Attorney provided that the Bank shall not
have any duty as to any Collateral, and the Bank shall be accountable only for
amounts that they actually receive as a result of the exercise of such powers.
NEITHER THE BANK, NOR ANY OF ITS AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES,
AGENTS OR REPRESENTATIVES SHALL BE RESPONSIBLE TO ANY GRANTOR FOR ANY ACT OR
FAILURE TO ACT UNDER ANY POWER OF ATTORNEY OR OTHERWISE, EXCEPT IN RESPECT OF
DAMAGES ATTRIBUTABLE SOLELY TO THEIR OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT
AS FINALLY DETERMINED BY A COURT OF COMPETENT JURISDICTION, NOR FOR ANY
PUNITIVE, EXEMPLARY, INDIRECT OR CONSEQUENTIAL DAMAGES.

                  7.       REMEDIES: RIGHTS UPON DEFAULT.

                  (a)      In addition to all other rights and remedies granted
to it under this Security Agreement, the Line of Credit Note, the Term Note, the
Credit Agreement, the other Loan Documents and under any other instrument or
agreement securing, evidencing or relating to any of the Secured Obligations, if
any Event of Default shall have occurred and be continuing, the Bank may
exercise all rights and remedies of a secured party under the Code. Without
limiting the generality of the foregoing, each Grantor expressly agrees that in
any such event the Bank, without demand of performance or other demand,
advertisement or notice of any kind (except the notice specified below of time
and place of public or private sale) to or upon such Grantor or any other Person
(all and each of which demands, advertisements and notices are hereby expressly
waived to the maximum extent permitted by the Code and other applicable law),
may forthwith enter upon the premises of such Grantor where any Collateral is
located through self-help, without judicial process, without first obtaining a
final judgment or giving such Grantor or any other Person notice and opportunity
for a hearing on the Bank's claim or action and may collect, receive, assemble,
process, appropriate and realize upon the Collateral, or any part thereof, and
may forthwith sell, lease, license, assign, give an option or options to
purchase, or sell or otherwise dispose of and deliver said Collateral (or
contract to do so), or any part thereof, in one or more parcels at a public or
private sale or sales, at any exchange at such prices as it may deem acceptable,
for cash or on credit or for future delivery without assumption of any credit
risk. The Bank shall have the right upon any such public sale or sales and, to
the extent permitted by law, upon any such private sale or sales, to purchase
for the benefit of the Bank, the whole or any part of said Collateral so sold,
free of any right or equity of redemption, which equity of redemption each
Grantor hereby releases. Such sales may be adjourned and continued from time to
time with or without notice. The Bank shall have the right to conduct such sales
on any Grantor's premises or elsewhere and shall have the right to use any
Grantor's premises without charge for such time or times as the Bank deems
necessary or advisable.

                  If any Event of Default shall have occurred and be continued,
each Grantor further agrees, at the Bank's request, to assemble the Collateral
and make it available to the Bank at a place or places designated by the Bank
which are reasonably convenient to the Bank and such Grantor, whether at such
Grantor's premises or elsewhere. Until the Bank is able to effect a sale, lease,
or other disposition of Collateral, the Bank shall have the right to hold or use
Collateral, or

                                                              Security Agreement

                                       10

<PAGE>

any part thereof, to the extent that it deems appropriate for the purpose of
preserving Collateral or its value or for any other purpose deemed appropriate
by the Bank. The Bank shall have no obligation to any Grantor to maintain or
preserve the rights of such Grantor as against third parties with respect to
Collateral while Collateral is in the possession of the Bank. The Bank may, if
it so elects, seek the appointment of a receiver or keeper to take possession of
Collateral and to enforce any of the Bank's remedies, with respect to such
appointment without prior notice or hearing as to such appointment. The Bank
shall apply the net proceeds of any such collection, recovery, receipt,
appropriation, realization or sale to the Secured Obligations as provided in the
Credit Agreement, and only after so paying over such net proceeds, and after the
payment by the Bank of any other amount required by any provision of law, need
the Bank account for the surplus, if any, to any Grantor. To the maximum extent
permitted by applicable law, each Grantor waives all claims, damages, and
demands against the Bank arising out of the repossession, retention or sale of
the Collateral except such as arise solely out of the gross negligence or
willful misconduct of the Bank as finally determined by a court of competent
jurisdiction. Each Grantor agrees that ten (10) days prior notice by the Bank of
the time and place of any public sale or of the time after which a private sale
may take place is reasonable notification of such matters. The Grantors shall
remain liable for any deficiency if the proceeds of any sale or disposition of
the Collateral are insufficient to pay all Secured Obligations, including any
attorneys' fees and other expenses incurred by the Bank to collect such
deficiency.

                  (b)      Except as otherwise specifically provided herein,
each Grantor hereby waives presentment, demand, protest or any notice (to the
maximum extent permitted by applicable law) of any kind in connection with this
Security Agreement or any Collateral.

                  (c)      To the extent that applicable law imposes duties on
the Bank to exercise remedies in a commercially reasonable manner, each Grantor
acknowledges and agrees that it is not commercially unreasonable for the Bank
(i) to fail to incur expenses reasonably deemed significant by the Bank to
prepare Collateral for disposition or otherwise to complete raw material or work
in process into finished goods or other finished products for disposition, (ii)
to fail to obtain third party consents for access to Collateral to be disposed
of, or to obtain or, if not required by other law, to fail to obtain
governmental or third party consents for the collection or disposition of
Collateral to be collected or disposed of, (iii) to fail to exercise collection
remedies against Account Debtors or other Persons obligated on Collateral or to
remove Liens on or any adverse claims against Collateral, (iv) to exercise
collection remedies against Account Debtors and other Persons obligated on
Collateral directly or through the use of collection agencies and other
collection specialists, (v) to advertise dispositions of Collateral through
publications or media of general circulation, whether or not the Collateral is
of a specialized nature, (vi) to contact other Persons, whether or not in the
same business as the Grantor, for expressions of interest in acquiring all or
any portion of such Collateral, (vii) to hire one or more professional
auctioneers to assist in the disposition of Collateral, whether or not the
Collateral is of a specialized nature, (viii) to dispose of Collateral by
utilizing internet sites that provide for the auction of assets of the types
included in the Collateral or that have the reasonable capacity of doing so, or
that match buyers and sellers of assets, (ix) to dispose of assets in wholesale
rather than retail markets, (x) to disclaim disposition warranties, such as
title, possession or quiet enjoyment, (xi) to purchase insurance or credit
enhancements to insure the Bank against risks of loss, collection or disposition
of Collateral or to provide to the Bank a guaranteed return from the

                                                              Security Agreement

                                       11

<PAGE>

collection or disposition of Collateral, or (xii) to the extent deemed
appropriate by the Bank, to obtain the services of other brokers, investment
bankers, consultants and other professionals to assist the Bank in the
collection or disposition of any of the Collateral. Each Grantor acknowledges
that the purpose of this Section 7(c) is to provide non-exhaustive indications
of what actions or omissions by the Bank would not be commercially unreasonable
in the Bank's exercise of remedies against the Collateral and that other actions
or omissions by the Bank shall not be deemed commercially unreasonable solely on
account of not being indicated in this Section 7(c). Without limitation upon the
foregoing, nothing contained in this Section 7(c) shall be construed to grant
any rights to any Grantor or to impose any duties on the Bank that would not
have been granted or imposed by this Security Agreement or by applicable law in
the absence of this Section 7(c).

                  (d)      The Bank shall not be required to make any demand
upon, or pursue or exhaust any of their rights or remedies against, any Grantor,
any other obligor, guarantor, pledgor or any other Person with respect to the
payment of the Secured Obligations or to pursue or exhaust any of their rights
or remedies with respect to any Collateral therefor or any direct or indirect
guarantee thereof. The Bank shall not be required to marshal the Collateral or
any guarantee of the Secured Obligations or to resort to the Collateral or any
such guarantee in any particular order, and all of its and their rights
hereunder or under any other Loan Document shall be cumulative. To the extent it
may lawfully do so, each Grantor absolutely and irrevocably waives and
relinquishes the benefit and advantage of, and covenants not to assert against
the Bank, any valuation, stay, appraisement, extension, redemption or similar
laws and any and all rights or defenses it may have as a surety now or hereafter
existing which, but for this provision, might be applicable to the sale of any
Collateral made under the judgment, order or decree of any court, or privately
under the power of sale conferred by this Security Agreement, or otherwise.

                  (e)      Without limiting the foregoing, upon the occurrence
and during the continuance of an Event of Default and upon written notice
thereof to the Grantors, all rights of a Grantor to exercise any voting or
consensual powers with respect to any capital stock in which such Grantor has an
interest and to receive and retain the distributions which it would otherwise be
entitled to receive and retain shall terminate and all such powers and rights to
receive and retain such distributions shall immediately without further action
become vested in the Bank.

                  8.       GRANT OF LICENSE TO USE INTELLECTUAL PROPERTY
COLLATERAL. For the purpose of enabling the Bank to exercise rights and remedies
under Section 7 hereof (including, without limiting the terms of Section 7
hereof, in order to take possession of, hold, preserve, process, assemble,
prepare for sale, market for sale, sell or otherwise dispose of Collateral) at
such time as the Bank shall be lawfully entitled to exercise such rights and
remedies, each Grantor hereby grants to the Bank an irrevocable, nonexclusive
license (exercisable without payment of royalty or other compensation to such
Grantor) to use, license or sublicense any Intellectual Property now owned or
hereafter acquired by such Grantor, and wherever the same may be located, and
including in such license access to all media in which any of the licensed items
may be recorded or stored and to all computer software and programs used for the
compilation or printout thereof.

                                                              Security Agreement

                                       12

<PAGE>

                  9.       INDEMNITY; EXPENSES; LIMITATION ON BANK'S DUTY IN
RESPECT OF COLLATERAL. (a) Whether or not the transactions contemplated hereby
are consummated, each Grantor shall indemnify and hold the Bank, its Affiliates,
directors, officers, agents, employees and representatives (collectively, the
"INDEMNIFIED PERSONS") harmless from and against any and all liabilities,
obligations, losses, damages, penalties, claims, demands, actions, judgments,
suits, costs, charges, expenses and disbursements (including reasonable
attorneys costs and expenses) of any kind or nature whatsoever which may at any
time (including at any time following repayment of the Secured Obligations or
any assignment by the Bank) be imposed on, incurred by or asserted against any
such Indemnified Person in any way relating to or arising out of or in
connection with the execution, delivery, enforcement, performance or
administration of this Security Agreement, the Credit Agreement, the other Loan
Documents or any other agreement, letter or instrument delivered in connection
with the transactions contemplated hereby or the consummation of the
transactions contemplated hereby or any actual or prospective claim, litigation,
investigation or proceeding relating to any of the foregoing, whether based on
contract, tort or any other theory (including any investigation of, preparation
for, or defense of any pending or threatened claim, investigation, litigation or
proceeding) and regardless of whether any Indemnified Person is a party thereto
(all the foregoing, collectively, the "INDEMNIFIED LIABILITIES"), in all cases,
whether or not caused by or arising, in whole or in part, out of the negligence
of any Indemnified Person; provided that such indemnity shall not, as to any
Indemnified Person, be available to the extent that such Indemnified Liabilities
are determined by a court of competent jurisdiction by final and nonappealable
judgment to have resulted from the gross negligence or willful misconduct of
such Indemnified Person. No Indemnified Person shall have any liability for any
indirect or consequential damages relating to this Security Agreement, the
Credit Agreement or any other Loan Document or arising out of its activities in
connection herewith or therewith (whether before or after the date hereof). In
the case of an investigation, litigation or other proceeding to which the
indemnity in this Section 9 applies, such indemnity shall be effective whether
or not such investigation, litigation or proceeding is brought by any Grantor,
its directors, shareholders or creditors or an Indemnified Party or any other
Person, whether or not an Indemnified Person is otherwise a party thereto and
whether or not any of the transactions contemplated hereunder or under any of
the other Loan Documents are consummated. All amounts due under this Section 9
shall be payable within five Business Days after demand therefor. The agreements
in this Section 9 shall survive the assignment by the Bank and the repayment,
satisfaction or discharge of all the other Secured Obligations. The Indemnified
Person agrees that in the event that any investigation, litigation or proceeding
is asserted or threatened in writing or instituted against it or any other
Indemnified Person, or any remedial, removal or response action which is
requested of it or any other Indemnified Person, for which such Indemnified
Person may desire indemnity or defense hereunder, such Indemnified Person shall
notify the Parent in writing of such event; provided that failure to so notify
the Parent shall not affect the right of any Indemnified Person to seek
indemnification under this Section 9.

                  (b)      Each Grantor will upon demand pay to the Bank the
amount of any and all reasonable expenses, including, without limitation, the
reasonable fees and expenses of its counsel and of any experts and agents, that
the Bank may incur in connection with (i) the administration of this Security
Agreement, (ii) the custody, preservation, use or operation of, or

                                                              Security Agreement

                                       13

<PAGE>

the sale of, collection from or other realization upon, any of the Collateral of
such Grantor, (iii) the exercise or enforcement of any of the rights of the Bank
hereunder or (iv) the failure by such Grantor to perform or observe any of the
provisions hereof.

                  (c)      The Bank shall use reasonable care with respect to
the Collateral in its possession or under its control. The Bank shall not have
any other duty as to any Collateral in its possession or control or in the
possession or control of any agent or nominee of the Bank or any income thereon
or as to the preservation of rights against prior parties or any other rights
pertaining thereto.

                  10.      REINSTATEMENT. This Security Agreement shall remain
in full force and effect and continue to be effective should any petition be
filed by or against any Grantor for liquidation or reorganization, should any
Grantor become insolvent or make an assignment for the benefit of any creditor
or creditors or should a receiver or trustee be appointed for all or any
significant part of any Grantor's assets, and shall continue to be effective or
be reinstated, as the case may be, if at any time payment and performance of the
Secured Obligations, or any part thereof, is, pursuant to applicable law,
rescinded or reduced in amount, or must otherwise be restored or returned by any
obligee of the Secured Obligations, whether as a "voidable preference,"
"fraudulent conveyance," or otherwise, all as though such payment or performance
had not been made. In the event that any payment, or any part thereof, is
rescinded, reduced, restored or returned, the Secured Obligations shall be
reinstated and deemed reduced only by such amount paid and not so rescinded,
reduced, restored or returned.

                  11.      NOTICES. Except as otherwise provided herein,
whenever it is provided herein that any notice, demand, request, consent,
approval, declaration or other communication shall or may be given to or served
upon any of the parties by any other party, or whenever any of the parties
desires to give and serve upon any other party any communication with respect to
this Security Agreement, each such notice, demand, request, consent, approval,
declaration or other communication shall be in writing and shall be given in the
manner, and deemed received, as provided for in the Credit Agreement.

                  12.      SEVERABILITY. Whenever possible, each provision of
this Security Agreement shall be interpreted in a manner as to be effective and
valid under applicable law, but if any provision of this Security Agreement
shall be prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity without invalidating
the remainder of such provision or the remaining provisions of this Security
Agreement. This Security Agreement is to be read, construed and applied together
with the Credit Agreement and the other Loan Documents which, taken together,
set forth the complete understanding and agreement of the Bank and Grantors with
respect to the matters referred to herein and therein.

                  13.      NO WAIVER; CUMULATIVE REMEDIES. The Bank shall not by
any act, delay, omission or otherwise be deemed to have waived any of its rights
or remedies hereunder, and no waiver shall be valid unless in writing, signed by
the Bank and then only to the extent therein set forth. A waiver by the Bank of
any right or remedy hereunder on any one occasion shall not be construed as a
bar to any right or remedy which the Bank would otherwise

                                                              Security Agreement

                                       14

<PAGE>

have had on any future occasion. No failure to exercise nor any delay in
exercising on the part of the Bank any right, power or privilege hereunder,
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right, power or privilege hereunder preclude any other or future exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies hereunder provided are cumulative and may be exercised singly or
concurrently, and are not exclusive of any rights and remedies provided by law.
None of the terms or provisions of this Security Agreement may be waived,
altered, modified or amended except by an instrument in writing, duly executed
by the Bank and Grantors.

                  14.      LIMITATION BY LAW. All rights, remedies and powers
provided in this Security Agreement may be exercised only to the extent that the
exercise thereof does not violate any applicable provision of law, and all the
provisions of this Security Agreement are intended to be subject to all
applicable mandatory provisions of law that may be controlling and to be limited
to the extent necessary so that they shall not render this Security Agreement
invalid, unenforceable, in whole or in part, or not entitled to be recorded,
registered or filed under the provisions of any applicable law.

                  15.      TERMINATION OF THIS SECURITY AGREEMENT. Subject to
Section 10 hereof, this Security Agreement shall terminate upon the Termination
Date.

                  16.      SUCCESSORS AND ASSIGNS. This Security Agreement and
all obligations of Grantors hereunder shall be binding upon the successors and
assigns of each Grantor (including any debtor-in-possession on behalf of such
Grantor) and shall, together with the rights and remedies of the Bank hereunder,
inure to the benefit of the Bank, all future holders of any instrument
evidencing any of the Secured Obligations and their respective successors and
assigns. No sales of participations, other sales, assignments, transfers or
other dispositions of any agreement governing or instrument evidencing the
Secured Obligations or any portion thereof or interest therein shall in any
manner impair the Lien granted to the Bank hereunder. No Grantor may assign,
sell, hypothecate or otherwise transfer any interest in or obligation under this
Security Agreement.

                  17.      COUNTERPARTS. This Security Agreement may be
authenticated in any number of separate counterparts, each of which shall
collectively and separately constitute one agreement. This Security Agreement
may be authenticated by manual signature, facsimile or, if approved in writing
by the Bank, electronic means, all of which shall be equally valid.

                  18.      GOVERNING LAW. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED
IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS OF
CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS SECURITY AGREEMENT AND THE
OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA.

                                                              Security Agreement

                                       15

<PAGE>

                  19.      ARBITRATION.

                  (a)      Arbitration. The parties hereto agree, upon demand by
any party, to submit to binding arbitration all claims, disputes and
controversies between or among them (and their respective employees, officers,
directors, attorneys, and other agents), whether in tort, contract or otherwise
arising out of or relating to in any way (i) the loan and related Loan Documents
which are the subject of the Credit Agreement and this Security Agreement and
its negotiation, execution, collateralization, administration, repayment,
modification, extension, substitution, formation, inducement, enforcement,
default or termination thereof; or (ii) requests for additional credit
thereunder.

                  (b)      Governing Rules. Any arbitration proceeding will (i)
proceed in a location in California selected by the American Arbitration
Association ("AAA"); (ii) be governed by the Federal Arbitration Act (Title 9 of
the United States Code), notwithstanding any conflicting choice of law provision
in any of the documents between the parties; and (iii) be conducted by the AAA,
or such other administrator as the parties shall mutually agree upon, in
accordance with the AAA's commercial dispute resolution procedures, unless the
claim or counterclaim is at least $1,000,000 exclusive of claimed interest,
arbitration fees and costs in which case the arbitration shall be conducted in
accordance with the AAA's optional procedures for large, complex commercial
disputes (the commercial dispute resolution procedures or the optional
procedures for large, complex commercial disputes to be referred to, as
applicable, as the "Rules"). If there is any inconsistency between the terms
hereof and the Rules, the terms and procedures set forth herein shall control.
Any party who fails or refuses to submit to arbitration following a demand by
any other party shall bear all costs and expenses incurred by such other party
in compelling arbitration of any dispute. Nothing contained herein shall be
deemed to be a waiver by any party that is a bank of the protections afforded to
it under 12 U.S.C. Section 91 or any similar applicable state law.

                  (c)      No Waiver of Provisional Remedies, Self-Help and
Foreclosure. The arbitration requirement does not limit the right of any party
to (i) foreclose against real or personal property collateral; (ii) exercise
self-help remedies relating to collateral or proceeds of collateral such as
setoff or repossession; or (iii) obtain provisional or ancillary remedies such
as replevin, injunctive relief, attachment or the appointment of a receiver,
before during or after the pendency of any arbitration proceeding. This
exclusion does not constitute a waiver of the right or obligation of any party
to submit any dispute to arbitration or reference hereunder, including those
arising from the exercise of the actions detailed in sections (i), (ii) and
(iii) of this paragraph.

                  (d)      Arbitrator Qualifications and Powers. Any arbitration
proceeding in which the amount in controversy is $5,000,000 or less will be
decided by a single arbitrator selected according to the Rules, and who shall
not render an award of greater than $5,000,000. Any dispute in which the amount
in controversy exceeds $5,000,000 shall be decided by majority vote of a panel
of three arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations. The arbitrator will be a neutral
attorney licensed in the State of California or a neutral retired judge of the
state or federal judiciary of California, in either case with a minimum of ten
years experience in the substantive law applicable to the subject matter of the
dispute to be arbitrated. The arbitrator will determine whether or not an issue
is arbitratable and will give effect to the statutes of limitation in
determining any claim. In

                                                              Security Agreement

                                       16

<PAGE>

any arbitration proceeding the arbitrator will decide (by documents only or with
a hearing at the arbitrator's discretion) any pre-hearing motions which are
similar to motions to dismiss for failure to state a claim or motions for
summary adjudication. The arbitrator shall resolve all disputes in accordance
with the substantive law of California and may grant any remedy or relief that a
court of such state could order or grant within the scope hereof and such
ancillary relief as is necessary to make effective any award. The arbitrator
shall also have the power to award recovery of all costs and fees, to impose
sanctions and to take such other action as the arbitrator deems necessary to the
same extent a judge could pursuant to the Federal Rules of Civil Procedure, the
California Rules of Civil Procedure or other applicable law. Judgment upon the
award rendered by the arbitrator may be entered in any court having
jurisdiction. The institution and maintenance of an action for judicial relief
or pursuit of a provisional or ancillary remedy shall not constitute a waiver of
the right of any party, including the plaintiff, to submit the controversy or
claim to arbitration if any other party contests such action for judicial
relief.

                  (e)      Discovery. In any arbitration proceeding discovery
will be permitted in accordance with the Rules. All discovery shall be expressly
limited to matters directly relevant to the dispute being arbitrated and must be
completed no later than 20 days before the hearing date and within 180 days of
the filing of the dispute with the AAA. Any requests for an extension of the
discovery periods, or any discovery disputes, will be subject to final
determination by the arbitrator upon a showing that the request for discovery is
essential for the party's presentation and that no alternative means for
obtaining information is available.

                  (f)      Class Proceedings and Consolidations. The resolution
of any dispute arising pursuant to the terms of this Agreement shall be
determined by a separate arbitration proceeding and such dispute shall not be
consolidated with other disputes or included in any class proceeding.

                  (g)      Payment Of Arbitration Costs And Fees. The arbitrator
shall award all costs and expenses of the arbitration proceeding.

                  (h)      Real Property Collateral; Judicial Reference.
Notwithstanding anything herein to the contrary, no dispute shall be submitted
to arbitration if the dispute concerns indebtedness secured directly or
indirectly, in whole or in part, by any real property unless (i) the holder of
the mortgage, lien or security interest specifically elects in writing to
proceed with the arbitration, or (ii) all parties to the arbitration waive any
rights or benefits that might accrue to them by virtue of the single action rule
statute of California, thereby agreeing that all indebtedness and obligations of
the parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If any
such dispute is not submitted to arbitration, the dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638 et
seq., and this general reference agreement is intended to be specifically
enforceable in accordance with said Section 638. A referee with the
qualifications required herein for arbitrators shall be selected pursuant to the
AAA's selection procedures. Judgment upon the decision rendered by a referee
shall be entered in the court in which such proceeding was commenced in
accordance with California Code of Civil Procedure Sections 644 and 645.

                                                              Security Agreement

                                       17

<PAGE>

                  (i)      Miscellaneous. To the maximum extent practicable, the
AAA, the arbitrators and the parties shall take all action required to conclude
any arbitration proceeding within 180 days of the filing of the dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business or by applicable law or
regulation. If more than one agreement for arbitration by or between the parties
potentially applies to a dispute, the arbitration provision most directly
related to the Loan Documents or the subject matter of the dispute shall
control. This arbitration provision shall survive termination, amendment or
expiration of any of the Loan Documents or any relationship between the parties.

                  20.      SECTION TITLES. The Section titles contained in this
Security Agreement are and shall be without substantive meaning or content of
any kind whatsoever and are not a part of the agreement between the parties
hereto.

                  21.      NO STRICT CONSTRUCTION. The parties hereto have
participated jointly in the negotiation and drafting of this Security Agreement.
In the event an ambiguity or question of intent or interpretation arises, this
Security Agreement shall be construed as if drafted jointly by the parties
hereto and no presumption or burden of proof shall arise favoring or disfavoring
any party by virtue of the authorship of any provisions of this Security
Agreement.

                  22.      ADVICE OF COUNSEL. Each of the parties represents to
each other party hereto that it has discussed this Security Agreement and,
specifically, the provisions of Section 18 and Section 19, with its counsel.

                  23.      BENEFIT OF THE BANK. All Liens granted or
contemplated hereby shall be for the benefit of the Bank and all proceeds or
payments realized from Collateral in accordance herewith shall be applied to the
Secured Obligations in the manner determined by the Bank in its sole discretion.

                  24.      RESTATEMENT OF PRIOR SECURITY DOCUMENTS. The Grantors
and the Bank hereby agree that (i) the terms and provisions of the Prior
Security Documents shall be and hereby are amended, superceded, restated and
consolidated in their entirety by the terms and provisions of this Security
Agreement, (ii) the Bank shall not have any obligations under the Prior Security
Documents, except to the extent that any such obligations may be restated in
this Security Agreement or in the other Loan Documents and (iii) the execution
and delivery of this Security Agreement shall not constitute or effect, or be
deemed to constitute or effect, a novation, refinancing, discharge,
extinguishment or refunding of any of the Indebtedness outstanding under the
Prior Credit Agreement or that portion of such Indebtedness that remain
outstanding under the Credit Agreement.

                            [Signature Page Follows]

                                                              Security Agreement

                                       18

<PAGE>

                  IN WITNESS WHEREOF, each of the parties hereto has caused this
Security Agreement to be executed and delivered by its duly authorized officer
as of the date first set forth above.

                                      VIRCO MFG. CORPORATION,
                                      a Delaware corporation

                                      By: /s/ Robert E. Dose
                                          ----------------------------------
                                      Name: Robert E. Dose
                                      Title: Vice President - Finance, Secretary
                                             and Treasurer

                                      VIRCO INC.,
                                      a Delaware corporation

                                      VIRCO MGMT. CORPORATION,
                                      a Delaware corporation

                                      By: /s/ Robert E. Dose
                                          ----------------------------------
                                      Name: Robert E. Dose
                                      Title: Authorized officer of each of the
                                             above referenced Grantors

                                      WELLS FARGO BANK, NATIONAL ASSOCIATION

                                      By: /s/ Randall J. Repp
                                          ----------------------------------
                                      Name: Randall J. Repp
                                      Title: Vice President

                                                               Signature Page to
                                                         Virco Mfg. Corporation.
                                                              Security Agreement

<PAGE>

                                                                  EXECUTION COPY

                                     ANNEX A
                                       TO
                               SECURITY AGREEMENT

                                   DEFINITIONS

         Capitalized terms used in the Security Agreement shall have the
following respective meanings, and all references to Sections, Exhibits,
Schedules or Annexes in the following definitions shall refer to Sections,
Exhibits, Schedules or Annexes of or to the Security Agreement:

         "ACCOUNT DEBTOR" means any Person who may become obligated to a Grantor
under, with respect to, or on account of, an Account, Chattel Paper or General
Intangibles (including a payment intangible).

         "ACCOUNTS" means all "accounts," as such term is defined in the Code,
now owned or hereafter acquired by a Grantor, including (a) all accounts
receivable, other receivables, book debts and other forms of obligations (other
than forms of obligations evidenced by Chattel Paper, or Instruments),
(including any such obligations that may be characterized as an account or
contract right under the Code), (b) all of a Grantor's rights in, to and under
all purchase orders or receipts for goods or services, (c) all of a Grantor's
rights to any goods represented by any of the foregoing (including unpaid
sellers' rights of rescission, replevin, reclamation and stoppage in transit and
rights to returned, reclaimed or repossessed goods), (d) all rights to payment
due to a Grantor for property sold, leased, licensed, assigned or otherwise
disposed of, for a policy of insurance issued or to be issued, for a secondary
obligation incurred or to be incurred, for energy provided or to be provided,
for the use or hire of a vessel under a charter or other contract, arising out
of the use of a credit card or charge card, or for services rendered or to be
rendered by a Grantor or in connection with any other transaction (whether or
not yet earned by performance on the part of a Grantor), (e) all health care
insurance receivables and (f) all collateral security of any kind, given by any
Account Debtor or any other Person with respect to any of the foregoing.

         "CHARGES" means all federal, state, county, city, municipal, local,
foreign or other governmental taxes, levies, assessments, charges, liens, claims
or encumbrances upon or relating to (a) the Collateral, (b) the Secured
Obligations, (c) the employees, payroll, income or gross receipts of a Grantor,
(d) a Grantor's ownership or use of any properties or other assets, or (e) any
other aspect of a Grantor's business.

         "CHATTEL PAPER" means any "chattel paper," as such term is defined in
the Code, including electronic chattel paper, now owned or hereafter acquired by
a Grantor.

         "COLLATERAL" has the meaning ascribed to it in Section 2(a).

         "CONTRACTS" means all "contracts," as such term is defined in the Code,
now owned or hereafter acquired by a Grantor, in any event, including all
contracts, undertakings, or agreements (other than rights evidenced by Chattel
Paper, Documents or Instruments) in or under which a Grantor may now or
hereafter have any right, title or interest.

                                                                      Annex A to
                                                              Security Agreement

<PAGE>

         "COPYRIGHT LICENSE" means any and all rights now owned or hereafter
acquired by a Grantor under any written agreement granting any right to use any
Copyright or Copyright registration.

         "COPYRIGHTS" means all of the following now owned or hereafter adopted
or acquired by a Grantor: (a) all copyrights, all General Intangibles of like
nature (whether registered or unregistered), all registrations and recordings
thereof, and all applications in connection therewith, including all
registrations, recordings and applications in the United States Copyright Office
or in any similar office or agency of the United States, any state or territory
thereof, or any other country or any political subdivision thereof, and (b) all
reissues, extensions or renewals thereof.

         "DEPOSIT ACCOUNT CONTROL AGREEMENT" means any agreement or arrangement
establishing "control" within the meaning of the Code over any Deposit Account,
including an arrangement establishing a secured party as the "customer" with
respect thereto which agreement or arrangement shall be in form and substance
reasonably satisfactory to the Bank.

         "DEPOSIT ACCOUNTS" means all "deposit accounts" as such term is defined
in the Code, nor or hereafter held in the name of a Grantor.

         "DOCUMENTS" means all "documents," as such term is defined in the Code,
now owned or hereafter acquired by a Grantor, wherever located.

         "EQUIPMENT" means all "equipment," as such term is defined in the Code,
now owned or hereafter acquired by a Grantor, wherever located and, in any
event, including all of such Grantor's machinery and equipment, including
processing equipment, conveyors, machine tools, data processing and computer
equipment, including embedded software and peripheral equipment and all
engineering, processing and manufacturing equipment, office machinery,
furniture, materials handling equipment, tools, attachments, accessories,
automotive equipment, trailers, trucks, forklifts, molds, dies, stamps, motor
vehicles, rolling stock and other equipment of every kind and nature, trade
fixtures and fixtures not forming a part of real property, together with all
additions and accessions thereto, replacements therefor, all parts therefor, all
substitutes for any of the foregoing, fuel therefor, and all manuals, drawings,
instructions, warranties and rights with respect thereto, and all products and
proceeds thereof and condemnation awards and insurance proceeds with respect
thereto.

         "FIXTURES" means all "fixtures" as such term is defined in the Code,
now owned or hereafter acquired by a Grantor.

         "GENERAL INTANGIBLES" means all "general intangibles," as such term is
defined in the Code, now owned or hereafter acquired by a Grantor, including all
right, title and interest that a Grantor may now or hereafter have in or under
any Contract, all payment intangibles, customer lists, Licenses, Copyrights,
Trademarks, Patents, and all applications therefor and reissues, extensions or
renewals thereof, rights in Intellectual Property, interests in partnerships,
joint ventures and other business associations, licenses, permits, copyrights,
trade secrets, proprietary or confidential information, inventions (whether or
not patented or patentable), technical

                                                                      Annex A to
                                                              Security Agreement

                                       2

<PAGE>

information, procedures, designs, knowledge, know-how, software, data bases,
data, skill, expertise, experience, processes, models, drawings, materials and
records, goodwill (including the goodwill associated with any Trademark or
Trademark License), all rights and claims in or under insurance policies
(including insurance for fire, damage, loss and casualty, whether covering
personal property, real property, tangible rights or intangible rights, all
liability, life, key man and business interruption insurance, and all unearned
premiums), choses in action, rights to receive tax refunds and other payments,
rights to receive dividends, distributions, cash, Instruments and other property
in respect of or in exchange for any pledged Investment Property, rights of
indemnification, all books and records, correspondence, credit files, invoices
and other papers, including without limitation all tapes, cards, computer runs
and other papers and documents in the possession or under the control of a
Grantor or any computer bureau or service company from time to time acting for a
Grantor.

         "GOODS" means all "goods" as defined in the Code, now owned or
hereafter acquired by a Grantor, wherever located, including embedded software
to the extent included in "goods" as defined in the Code.

         "INSTRUMENTS" means all "instruments," as such term is defined in the
Code, now owned or hereafter acquired by a Grantor, wherever located, and, in
any event, including all certificated securities, all certificates of deposit,
and all promissory notes and other evidences of indebtedness, other than
instruments that constitute, or are a part of a group of writings that
constitute, Chattel Paper.

         "INTELLECTUAL PROPERTY" means any and all Licenses, Patents,
Copyrights, Trademarks, and the goodwill associated with such Trademarks.

         "INTELLECTUAL PROPERTY SECURITY AGREEMENT" means an intellectual
property security agreement substantially in the form of Exhibit I attached
hereto and shall include any amendments, restatements, supplements, or other
modifications thereto.

         "INVENTORY" means all "inventory," as such term is defined in the Code,
now owned or hereafter acquired by a Grantor, wherever located, and in any event
including inventory, merchandise, goods and other personal property that are
held by or on behalf of a Grantor for sale or lease or are furnished or are to
be furnished under a contract of service, or that constitute raw materials, work
in process, finished goods, returned goods, or materials or supplies of any
kind, nature or description used or consumed or to be used or consumed in a
Grantor's business or in the processing, production, packaging, promotion,
delivery or shipping of the same, including all supplies and embedded software.

         "INVESTMENT PROPERTY" means all "investment property" as such term is
defined in the Code now owned or hereafter acquired by a Grantor, wherever
located, including (i) all securities, whether certificated or uncertificated,
including stocks, bonds, interests in limited liability companies, partnership
interests, treasuries, certificates of deposit, and mutual fund shares; (ii) all
securities entitlements of a Grantor, including the rights of a Grantor to any
securities account and the financial assets held by a securities intermediary in
such securities account and any free credit balance or other money owing by any
securities intermediary with

                                                                      Annex A to
                                                              Security Agreement

                                        3

<PAGE>

respect to that account; (iii) all securities accounts of a Grantor; (iv) all
commodity contracts of a Grantor; and (v) all commodity accounts held by a
Grantor.

         "INVESTMENT PROPERTY CONTROL AGREEMENT" means an agreement (in form and
substance reasonably acceptable to the Bank) among a Grantor, the Bank and (i)
the issuer of uncertificated securities with respect to uncertificated
securities in the name of a Grantor, (ii) a securities intermediary with respect
to securities, whether certificated or uncertificated, securities entitlements
and other financial assets held in a securities account in the name of a
Grantor, (iii) a futures commission merchant or clearing house, as applicable,
with respect to commodity accounts and commodity contracts held by a Grantor,
whereby, among other things, the issuer, securities intermediary or futures
commission merchant disclaims any security interest in the applicable financial
assets, acknowledges the Lien of the Bank in such financial assets, and agrees
to follow the instructions or entitlement orders of the Bank without further
consent by any Grantor.

         "LETTER-OF-CREDIT RIGHTS" means "letter-of-credit rights" as such term
is defined in the Code, now owned or hereafter acquired by a Grantor, including
rights to payment or performance under a letter of credit, whether or not a
Grantor, as beneficiary, has demanded or is entitled to demand payment or
performance.

         "LICENSE" means any Copyright License, Patent License, Trademark
License or other license of rights or interests now held or hereafter acquired
by a Grantor.

         "PATENT LICENSE" means rights under any written agreement now owned or
hereafter acquired by a Grantor granting any right with respect to any invention
on which a Patent is in existence.

         "PATENTS" means all of the following in which a Grantor now holds or
hereafter acquires any interest: (a) all letters patent of the United States or
of any other country, all registrations and recordings thereof, and all
applications for letters patent of the United States or of any other country,
including registrations, recordings and applications in the United States Patent
and Trademark Office or in any similar office or agency of the United States,
any State, or any other country, and (b) all reissues, continuations,
continuations-in-part or extensions thereof.

         "PROCEEDS" means "proceeds," as such term is defined in the Code,
including (a) any and all proceeds of any insurance, indemnity, warranty or
guaranty payable to a Grantor from time to time with respect to any of the
Collateral, (b) any and all payments (in any form whatsoever) made or due and
payable to a Grantor from time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of all or any part of the
Collateral by any Governmental Entity (or any Person acting under color of
Governmental Entity), (c) any claim of a Grantor against third parties (i) for
past, present or future infringement of any Patent or Patent License, or (ii)
for past, present or future infringement or dilution of any Copyright, Copyright
License, Trademark or Trademark License, or for injury to the goodwill
associated with any Trademark or Trademark License, (d) any recoveries by a
Grantor against third parties with respect to any litigation or dispute
concerning any of the Collateral including claims arising out of the loss or
nonconformity of, interference with the use of, defects in, or infringement of
rights

                                                                      Annex A to
                                                              Security Agreement

                                        4

<PAGE>

in, or damage to, Collateral, (e) all amounts collected on, or distributed on
account of, other Collateral, including dividends, interest, distributions and
Instruments with respect to Investment Property, and (f) any and all other
amounts, rights to payment or other property acquired upon the sale, lease,
license, exchange or other disposition of Collateral and all rights arising out
of Collateral.

         "SECURED OBLIGATIONS" means, with respect to each Grantor, all loans,
advances, debts, liabilities and obligations for the performance of covenants,
tasks or duties or for payment of monetary amounts (whether or not such
performance is then required or contingent, or such amounts are liquidated or
determinable) owing by such Grantor to the Bank and all covenants and duties
regarding such amounts, of any kind or nature, present or future, whether or not
evidenced by any note, agreement or other instrument, in each case arising under
the Credit Agreement, the Line of Credit Note, the Term Note, this Security
Agreement or any other Loan Document to which such Grantor is a party. This term
includes all Obligations (including principal, interest (including all interest
that accrues after the commencement of any case or proceeding by or against a
Grantor an Insolvency Proceeding, whether or not allowed in such case or
proceeding), Charges, expenses, attorneys' fees and any other sum chargeable to
a Grantor under the Credit Agreement, the Line of Credit Note, the Term Note,
this Security Agreement or any other Loan Document).

         "SECURITY AGREEMENT" means the Security Agreement of even date herewith
among the Grantors and the Bank, as the same may be amended, supplemented,
restated or otherwise modified from time to time.

         "SOFTWARE" means all "software" as such term is defined in the Code,
now owned or hereafter acquired by a Grantor, other than software embedded in
any category of Goods, including all computer programs and all supporting
information provided in connection with a transaction related to any program.

         "SUPPORTING OBLIGATIONS" means all "supporting obligations" as such
term is defined in the Code, including letters of credit and guaranties issued
in support of Accounts, Chattel Paper, Documents, General Intangibles,
Instruments, or Investment Property.

         "TERMINATION DATE" means the date on which all obligations of the
Grantors to the Bank or its assigns under the Line of Credit Note, the Term
Note, the Credit Agreement, this Security Agreement and each other Loan Document
to which each is a party have been indefeasibly satisfied.

         "TRADEMARK LICENSE" means rights under any written agreement now owned
or hereafter acquired by a Grantor granting any right to use any Trademark.

         "TRADEMARKS" means all of the following now owned or hereafter existing
or adopted or acquired by a Grantor: (a) all trademarks, trade names, corporate
names, business names, trade styles, service marks, logos, other source or
business identifiers, prints and labels on which any of the foregoing have
appeared or appear, designs and General Intangibles of like nature (whether
registered or unregistered), all registrations and recordings thereof, and all
applications in

                                                                      Annex A to
                                                              Security Agreement

                                        5

<PAGE>

connection therewith, including registrations, recordings and applications in
the United States Patent and Trademark Office or in any similar office or agency
of the United States, any state or territory thereof, or any other country or
any political subdivision thereof; (b) all reissues, extensions or renewals
thereof; and (c) all goodwill associated with or symbolized by any of the
foregoing.

         The words "herein," "hereof" and "hereunder" and other words of similar
import refer to the Security Agreement as a whole, including all Annexes,
Exhibits and Schedules, as the same may from time to time be amended, restated,
modified or supplemented, and not to any particular section, subsection section
or clause contained in the Security Agreement or any such Annex, Exhibit or
Schedule.

         Wherever from the context it appears appropriate, each term stated in
either the singular or plural shall include the singular and the plural, and
pronouns stated in the masculine, feminine or neuter gender shall include the
masculine, feminine and neuter genders. The words "including", "includes" and
"include" shall be deemed to be followed by the words "without limitation"; the
word "or" is not exclusive; references to Persons include their respective
successors and assigns or, in the case of governmental Persons, Persons
succeeding to the relevant functions of such Persons; and all references to
statutes and related regulations shall include any amendments of the same and
any successor statutes and regulations. Whenever any provision in this Security
Agreement refers to the knowledge (or an analogous phrase) of a Grantor, such
words are intended to signify that such Grantor has actual knowledge or
awareness of a particular fact or circumstance or that Grantor, if it had
exercised reasonable diligence, would have known or been aware of such fact or
circumstance.

                                                                      Annex A to
                                                              Security Agreement

                                        6

<PAGE>

                                   SCHEDULE I
                                       TO
                               SECURITY AGREEMENT

                              FILING JURISDICTIONS

              Virco Mfg. Corporation -- Delaware Secretary of State

                    Virco Inc. -- Delaware Secretary of State

             Virco Mgmt. Corporation -- Delaware Secretary of State

<PAGE>

                                  SCHEDULE II
                                       TO
                               SECURITY AGREEMENT

                                  INSTRUMENTS,
                                  CHATTEL PAPER
                                       AND
                             LETTER OF CREDIT RIGHTS

                                   INSTRUMENTS

                                      None

                                  CHATTEL PAPER

                                      None

                             LETTER OF CREDIT RIGHTS

                             $100,000 To expire 2/4/04
                             $ 30,000 To expire 2/25/04
                             $ 60,000 To expire 5/1/04
                             $ 10,000 To expire 8/20/04

<PAGE>

                                  SCHEDULE III
                                       TO
                               SECURITY AGREEMENT

                  SCHEDULE OF OFFICES, LOCATIONS OF COLLATERAL
           AND RECORDS CONCERNING VIRCO MFG. CORPORATION'S COLLATERAL

I.      Grantor's official name: VIRCO MFG. CORPORATION

II.     Type of entity (e.g. corporation, partnership, business trust, limited
        partnership, limited liability company): Corporation

III.    Former names, tradenames and fictitious names: None

IV.     Organizational identification number issued by Grantor's state of
        incorporation or organization or a statement that no such number has
        been issued: 2033553

V.      State of Incorporation or Organization: Delaware

VI.     Chief Executive Office and principal place of business:

                                   2027 Harpers Way
                                   Torrance, California 90501

VII.    Other Corporate Offices: None

VIII.   Warehouses:              Factory and Warehouse: 2027 Harpers Way

                                                        Torrance, CA  90501

                                 Factory and Warehouse  1701 Sturgis Road

                                                        Conway, AR

                                 Factory:               900 Robins Street

                                                        Conway, AR

<PAGE>

                                 Warehouse:             250 Harkrider Street

                                                        Conway, AR

                                 Warehouse:             Logistics Services, Inc.
                                                        9001 Lindsey Road
                                                        Little Rock, AR 72206

                                 Warehouse:             C.M.D.
                                                        222 E. Manville Street
                                                        Compton, CA 90220

IX.      Other Premises at which Collateral is Stored or Located: None

X.       Locations of Records Concerning Collateral:    2027 Harpers Way

                                                        Torrance, CA  90501

                                       10

<PAGE>

                  SCHEDULE OF OFFICES, LOCATIONS OF COLLATERAL
                 AND RECORDS CONCERNING VIRCO INC.'S COLLATERAL

I.       Grantor's official name: VIRCO INC.

II.      Type of entity (e.g. corporation, partnership, business trust, limited
         partnership, limited liability company): Corporation

III.     Former names, tradenames and fictitious names: None

IV.      Organizational identification number issued by Grantor's state of
         incorporation or organization or a statement that no such number has
         been issued: 2921021

V.       State of Incorporation or Organization: Delaware

VI.      Chief Executive Office and principal place of business:

                                    2027 Harpers Way
                                    Torrance, California 90501

VII.     Other Corporate Offices: None

VIII.    Warehouses: None

IX.      Other Premises at which Collateral is Stored or Located: None

X.       Locations of Records Concerning Collateral: 2027 Harpers Way

                                                     Torrance, CA  90501

<PAGE>

                  SCHEDULE OF OFFICES, LOCATIONS OF COLLATERAL
                 AND RECORDS CONCERNING VIRCO MGMT'S COLLATERAL

I.       Grantor's official name: VIRCO MGMT. CORPORATION

II.      Type of entity (e.g. corporation, partnership, business trust, limited
         partnership, limited liability company): Corporation

III.     Former names, tradenames and fictitious names: None

IV.      Organizational identification number issued by Grantor's state of
         incorporation or organization or a statement that no such number has
         been issued: 2921024

V.       State of Incorporation or Organization: Delaware

VI.      Chief Executive Office and principal place of business:

                                    2027 Harpers Way
                                    Torrance, California 90501

VII.     Other Corporate Offices: None

VIII.    Warehouses: None

IX.      Other Premises at which Collateral is Stored or Located: None

X.       Locations of Records Concerning Collateral: 2027 Harpers Way

                                                     Torrance, CA  90501

<PAGE>

                                  SCHEDULE IV
                                       TO
                               SECURITY AGREEMENT

                       PATENTS, TRADEMARKS AND COPYRIGHTS

U.S. Intellectual Property held by
Virco Mfg. Corporation or its Subsidiaries
as of November 14, 2003

PATENTS:

<TABLE>
<CAPTION>
Type           USPTO #                         Description
<S>           <C>                <C>
Design         D479,118          Grommet
Utility       6,585,320          Tilt control mechanism for a tilt back chair
Design         D476,512          Furniture leg
Design         D474,044          Desk
Design         D473,399          Desk
Design         D473,068          Desk
Utility       6,533,352          Chair with reclining back rest
Design         D471,729          Four-legged chair
Design         D469,969          Four-legged chair
Design         D469,284          Chair
Design         D469,265          Chair
Utility       6,484,647          Office furniture system
Design         D461,348          Chair portion
Design         D461,345          Chair base
Design         D461,322          Chair
Utility       6,247,770          Furniture construction
Design         D441,557          Lightweight chair
Design         D437,124          Chair
Design         D431,910          Chair
Design         D431,910          Easel
Utility       6,116,692          Chair construction
Design         D429,914          Lectern
Design         D429,546          Projector cart
Design         D427,405          Book truck
Design         D427,404          Conference cart
Design         D425,319          Chair with end panel
Utility       6,058,854          Lightweight plastic furniture
Design         D421,533          Workstation module
Design         D417,969          Chair frame
Utility       6,004,157          Connector module
Utility       6,003,948          Chair construction
</TABLE>

<PAGE>

<TABLE>
<S>           <C>                <C>
Design         D417,342          Chair with tablet arm
Design         D417,095          Table with modesty panel
Utility       5,983,807          Lightweight plastic furniture
Design         D414,618          Power module
Utility       5,934,203          Table construction
Utility       5,924,770          Chair construction
Design         D410,801          Chair with arm rests
Design         D407,830          Trim strip
</TABLE>

<TABLE>
<CAPTION>
Type           USPTO #                   Description
<S>           <C>                <C>
Utility       5,868,081          Lightweight plastic furniture
Utility       5,694,865          Lightweight plastic furniture
Utility       4,841,877          Table
Utility       4,768,833          Chair construction
Design         D296,732          High chair
Utility       4,727,816          Table
Utility       4,710,049          Safety hinge
Design         D289,235          Chair
Utility       4,400,031          Interlocking chair
</TABLE>

TRADEMARKS:

<TABLE>
<CAPTION>
Mark                               USPTO #
<S>                              <C>
9000 Chair                       2,068,214
And-1                            App. pending
Cheers                           App. pending
Core-a-Gator (name)              2,122,306
Core-a-Gator (logo)              2,137,835
Core-a-Gator (design)            2,145,248
Designed for Stacking,
     The Safe Edge               1,518,917
Designing Quality,
     Furnishing Value            2,074,335
Egg                              2,265,456
ErgoCombo                        App. pending
Express Rail                     App. pending
Furniture Focus                  App. pending
Furniture that Fits              2,100,181
Furnishings that Fit             App. pending
Future Access                    2,416,339
Gator-Gram                       2,131,937
IQ                               2,350,789
Lunada                           2,678,466
Martest                          0,740,021
</TABLE>

                                       14

<PAGE>

<TABLE>
<S>                              <C>
Martest 21                       2,404,744
Mojave                           2,605,121
Ph.D.                            App. 75/496,005
Planscape                        App. pending
Plateau                          2,190,003
Rol-Fol (Stylized)               0,586,886
Sure Edge                        App. 76/332,595
Symposium                        2,309,622
V                                0,983,345
</TABLE>

<TABLE>
Mark                             USPTO#
<S>                              <C>
Vespers                          2,341,840
Virco (Design only)              2,068,214
Virco (Stylized)                 0,622,279
Virco (Design)                   1,970,054
Vircolite                        0,638,621
Virtue                           1,059,295
Virtue of California             0,877,409
Virtuoso                         2,329,332
Zuma                             App. pending
</TABLE>

                                       15

<PAGE>

                                   SCHEDULE V
                                       TO
                               SECURITY AGREEMENT

                                 CAPITALIZATION

[NUMBER OF ISSUED AND OUTSTANDING SHARES OF STOCK OF EACH SUBSIDIARY OF VIRCO]

<TABLE>
<CAPTION>
                             # of Issued and Outstanding Shares of Stock
                             -------------------------------------------
<S>                          <C>
Virco Inc.                                   10
Virco Mgmt. Corporation                      10
</TABLE>

<PAGE>

                                   SCHEDULE VI
                                       TO
                               SECURITY AGREEMENT

                                DEPOSIT ACCOUNTS

         Non-Wells Fargo Bank: Of Virco Mfg. Corporation:

         Wells Fargo Bank:

         Controlled Disbursement:      4759031149

         Payroll:                      4038174199

         Payroll:                      4648064988

         Operating Account:            4648052785

         First State Bank (Concentration/PR)
         P.O. Box 966, Conway, AR 72033,
         #0002018160

         KeyBank(Petty Cash <$1,000)
         14 West Main Street, Lexington, Ohio  44904
         #351321001692

Of Virco Mgmt. Corporation:            None

Of Virco, Inc.:                        None

<PAGE>

                                    EXHIBIT A

                                     FORM OF
                                POWER OF ATTORNEY

                  This Power of Attorney is executed and delivered by
______________________, a _____________________ corporation (the "GRANTOR") to
WELLS FARGO BANK, NATIONAL ASSOCIATION (hereinafter referred to as "ATTORNEY"),
under a Credit Agreement and a Security Agreement, each dated as of January 27,
2004 and other related documents (the "LOAN DOCUMENTS"). No person to whom this
Power of Attorney is presented, as authority for Attorney to take any action or
actions contemplated hereby, shall be required to inquire into or seek
confirmation from the Grantor as to the authority of the Attorney to take any
action described below, or as to the existence of or fulfillment of any
condition to this Power of Attorney, which is intended to grant to the Attorney
unconditionally the authority to take and perform the actions contemplated
herein, and the Grantor irrevocable waives any right to commence any suit or
action, in law or equity, against any person or entity which acts in reliance
upon or acknowledges the authority granted under this Power of Attorney. The
power of attorney granted hereby is coupled with an interest, and may not be
revoked or canceled by the Grantor without the Attorney' s written consent.

                  The Grantor hereby irrevocably constitutes and appoints the
Attorney (and all officers, employees or agents designated by the Attorney),
with full power of substitution, as the Grantor's true and lawful
attorney-in-fact with full irrevocable power and authority in the place and
stead of the Grantor and in the name of the Grantor or in its own name, from
time to time in the Attorney's discretion, to take any and all appropriate
action and to execute and deliver any and all documents and instruments which
may be necessary or desirable to accomplish the purposes of the Note Documents
and, without limiting the generality of the foregoing, the Grantor hereby grants
to the Attorney the power and right, on behalf of the Grantor, without notice to
or assent by the Grantor, and at any time, to do the following: (a) change the
mailing address of the Grantor, open a post office box on behalf of the Grantor,
open mail for the Grantor, and ask, demand, collect, give acquittances and
receipts for, take possession of, endorse any invoices, freight or express
bills, bills of lading, storage or warehouse receipts, drafts against debtors,
assignments, verifications, and notices in connection with any property of the
Grantor; (b) effect any repairs to any asset of the Grantor, or continue or
obtain any insurance and pay all or any part of the premiums therefor and costs
thereof, and make, settle and adjust all claims under such policies of
insurance, and make all determinations and decisions with respect to such
policies; (c) pay or discharge any taxes, liens, security interests, or other
encumbrances levied or placed on or threatened against the Grantor or its
property; (d) defend any suit, action or proceeding brought against the Grantor
if the Grantor does not defend such suit, action or proceeding or if the
Attorney believes that the Grantor is not pursuing such defense in a manner that
will maximize the recovery to the Attorney, and settle, compromise or adjust any
suit, action, or proceeding described above and, in connection therewith, give
such discharges or releases as the Attorney may deem appropriate; (e) file or
prosecute any claim, litigation, suit or proceeding in any court of competent
jurisdiction or before any arbitrator, or take any other action otherwise deemed
appropriate by the Attorney for the purpose of collecting any and all such
moneys due to the Grantor whenever payable and to enforce any other right in
respect of the Grantor's property;

<PAGE>

(f) cause the certified public accountants then engaged by the Grantor to
prepare and deliver to the Attorney at any time and from time to time, promptly
upon the Attorney's request, the following reports: (1) a reconciliation of all
accounts, (2) an aging of all accounts, (3) trial balances, (4) test
verifications of such accounts as the Attorney may request, and (5) the results
of each physical verification of inventory; (g) communicate in its own name with
any party to any contract with regard to the assignment of the right, title and
interest of such Grantor in and under the contracts and other matters relating
thereto; (h) to file such financing statements with respect to the Security
Agreement, with or without Grantor's signature, or to file a photocopy of the
Security Agreement in substitution for a financing statement, as the Bank may
deem appropriate and to execute in the Grantor's name such financing statements
and amendments thereto and continuation statements which may require the
Grantor's signature; and (i) execute, in connection with any sale provided for
in any Loan Document, any endorsements, assignments or other instruments of
conveyance or transfer with respect to the Collateral and to otherwise direct
such sale or resale, all as though the Attorney were the absolute owner of the
property of the Grantor for all purposes, and to do, at the Attorney's option
and the Grantor's expense, at any time or from time to time, all acts and other
things that the Attorney reasonably deems necessary to perfect, preserve, or
realize upon the Grantor's property or assets and the Bank's Liens thereon, all
as fully and effectively as the Grantor might do. The Grantor hereby ratifies,
to the extent permitted by law, all that said Attorney shall lawfully do or
cause to be done by virtue hereof.

                  IN WITNESS WHEREOF, this Power of Attorney is executed by the
Grantor, and the Grantor has caused its seal to be affixed pursuant to the
authority of its board of directors this ____ day of January , 2004.

                                       [_______________________________________]

                                       By:_____________________________________
                                       Name:___________________________________
                                       Title:__________________________________

                            NOTARY PUBLIC CERTIFICATE

                  On this _____ day of ______________, 200_, ___________________
[name] who is personally known to me appeared before me in his/her capacity as
the _________________[title] of _______________________ [Grantor] ("Grantor")
and executed on behalf of the Grantor the Power of Attorney in favor of Wells
Fargo Bank, National Association [Attorney] to which this Certificate is
attached.

                                            ____________________________________
                                            Notary Public

                                       2

<PAGE>

                                                                       EXHIBIT I

                                     FORM OF
                    INTELLECTUAL PROPERTY SECURITY AGREEMENT

                  This INTELLECTUAL PROPERTY SECURITY AGREEMENT (as amended,
restated, supplemented or otherwise modified from time to time, the "IP SECURITY
AGREEMENT") dated ________, ____, is made by the undersigned (the "GRANTOR") in
favor of WELLS FARGO BANK, NATIONAL ASSOCIATION.

                  WHEREAS, pursuant to the Credit Agreement dated as of January
27, 2004 (as amended, restated, supplemented or otherwise modified , the "CREDIT
AGREEMENT") between the Parent and the Bank, the Bank has agreed to made certain
loans and other financial accommodations to the Parent;

                  [WHEREAS, as a condition to the Bank's obligation to extend
such loans and other financial accommodations, the [Parent] [undersigned] agreed
to [guaranty the Parent's obligations under the Credit Agreement and the other
Loan Documents to which the Parent is party and] to collateralize [its
obligations under the Credit Agreement and the other Loan Documents to which it
is party] [such guaranty] by entering into the Security Agreement dated as of
[-], 2004 (as amended, restated, supplemented or otherwise modified, the
"SECURITY AGREEMENT"; terms defined in the Security Agreement and not otherwise
defined herein are used herein as therein defined) among the Parent, [the
undersigned,] [the other Subsidiaries of the Company] and the Bank; and]

                  WHEREAS, under the terms of the Security Agreement, the
undersigned has granted to the Bank a security interest in, among other
property, certain intellectual property of the undersigned, and has agreed as a
condition thereof to execute this IP Security Agreement for recording with the
U.S. Patent and Trademark Office, the United States Copyright Office and other
Governmental Entities.

                  NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Grantor agrees as
follows:

                  SECTION 1. Grant of Security. The Grantor hereby grants to the
Bank a security interest in all of the Grantor's right, title and interest in
and to the following (the "COLLATERAL"):

                  (i)      the Patents set forth in Schedule A hereto;

                  (ii)     the Trademarks set forth in Schedule B hereto,
         together with the goodwill symbolized thereby;

                  (iii)    all Copyrights and exclusive Copyright licenses set
         forth in Schedule C hereto;

                  (iv)     all reissues, divisions, continuations,
         continuations-in-part, extensions, renewals and reexaminations of any
         of the foregoing, all rights in the foregoing provided

                                       1

<PAGE>

         by international treaties or conventions, all rights corresponding
         thereto throughout the world and all other rights of any kind
         whatsoever of the Grantor accruing thereunder or pertaining thereto;

                  (v)      any and all claims for damages and injunctive relief
         for past, present and future infringement, dilution, misappropriation,
         violation, misuse or breach with respect to any of the foregoing, with
         the right, but not the obligation, to sue for and collect, or otherwise
         recover, such damages; and

                  (vi)     any and all Proceeds of, collateral for, income,
         royalties and other payments now or hereafter due and payable with
         respect to, and Supporting Obligations relating to, any and all of the
         Collateral of or arising from any of the foregoing.

                  SECTION 2. Security for Obligations. The grant of a security
interest in, the Collateral by the Grantor under this IP Security Agreement
secures the payment of the Grantor's Secured Obligations now or hereafter
existing under or in respect of the Loan Documents, whether direct or indirect,
absolute or contingent, and whether for principal, reimbursement obligations,
interest, premiums, penalties, fees, indemnifications, contract causes of
action, costs, expenses or otherwise.

                  SECTION 3. Recordation. The Grantor authorizes and requests
that the Register of Copyrights, the Commissioner for Patents and the
Commissioner for Trademarks and any other applicable government officer record
this IP Security Agreement.

                  SECTION 4. Execution in Counterparts. This IP Security
Agreement may be executed in any number of counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.

                  SECTION 5. Grants, Rights and Remedies. This IP Security
Agreement has been entered into in conjunction with the provisions of the
Security Agreement. The Grantor does hereby acknowledge and confirm that the
grant of the security interest hereunder to, and the rights and remedies of, the
Bank with respect to the Collateral are more fully set forth in the Security
Agreement, the terms and provisions of which are incorporated herein by
reference as if fully set forth herein.

                  SECTION 6. Governing Law. This IP Security Agreement shall be
governed by, and construed in accordance with, the laws of the State of
California.

                            [Signature Page Follows]

                                       2

<PAGE>

                  IN WITNESS WHEREOF, the Grantor has caused this IP Security
Agreement to be duly executed and delivered by its officer thereunto duly
authorized as of the date first above written.

                                             ___________________________________

                                             By ________________________________
                                                Name:
                                                Title:

<PAGE>

                                   SCHEDULE A

                                     PATENTS
                                       OF
                                _______________

                                     PATENTS

<TABLE>
<CAPTION>
PATENT                      REGISTRATION NO.                   REGISTRATION DATE
- --------------------------------------------------------------------------------
<S>                         <C>                                <C>
</TABLE>

                               PATENT APPLICATIONS

<TABLE>
<CAPTION>
PATENT                      SERIAL NO.                         APPLICATION DATE
- --------------------------------------------------------------------------------
<S>                         <C>                                <C>
</TABLE>

<PAGE>

                                   SCHEDULE B

                                   TRADEMARKS
                                       OF
                              ____________________

                          TRADEMARKS AND SERVICE MARKS

<TABLE>
<CAPTION>
TRADEMARK/SERVICE MARK          REGISTRATION NO.               REGISTRATION DATE
- --------------------------------------------------------------------------------
<S>                             <C>                            <C>
</TABLE>

                     TRADEMARK AND SERVICE MARK APPLICATIONS

<TABLE>
<CAPTION>
TRADEMARK/SERVICE MARK             SERIAL NO.                   APPLICATION DATE
- --------------------------------------------------------------------------------
<S>                                <C>                          <C>
</TABLE>

<PAGE>

                                   SCHEDULE C

                                   COPYRIGHTS
                                       OF
                                 ______________

                                   COPYRIGHTS

<TABLE>
<CAPTION>
COPYRIGHT                   REGISTRATION NO.                   REGISTRATION DATE
- --------------------------------------------------------------------------------
<S>                         <C>                                <C>
</TABLE>

                             COPYRIGHT APPLICATIONS

<TABLE>
<CAPTION>

COPYRIGHT                     SERIAL NO.                        APPLICATION DATE
- --------------------------------------------------------------------------------
<S>                           <C>                               <C>
</TABLE>

                          EXCLUSIVE COPYRIGHT LICENSES

<TABLE>
<CAPTION>
COPYRIGHT LICENSE                        DESCRIPTION
- --------------------------------------------------------------------------------
<S>                                      <C>
</TABLE>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.8
<SEQUENCE>10
<FILENAME>v96066exv99w8.txt
<DESCRIPTION>EXHIBIT 99.8
<TEXT>
<PAGE>

EXHIBIT 99.8

  THIS INSTRUMENT PREPARED BY:

  Gibson Dunn & Crutcher LLP
  333 S. Grand Avenue
  Los Angeles, CA 90071
  Attn: Janna Jenkins

  AND WHEN RECORDED MAIL TO:

  Commercial Banking Group (AU #2702)
  201 Third Street, 8th Floor
  San Francisco, CA  94013
  Attn: Records Management / Team 2
  Loan No. 8079119402

     THIS MORTGAGE SECURES NOTES WHICH PROVIDE FOR A VARIABLE INTEREST RATE

                                    MORTGAGE
                  WITH ABSOLUTE ASSIGNMENT OF LEASES AND RENTS,
                      SECURITY AGREEMENT AND FIXTURE FILING

THE PARTIES TO THIS MORTGAGE WITH ABSOLUTE ASSIGNMENT OF LEASES AND RENTS,
SECURITY AGREEMENT AND FIXTURE FILING ("Mortgage"), made as of January __, 2004,
are VIRCO MFG. CORPORATION ("Mortgagor") and Wells Fargo Bank, National
Association ("Mortgagee"). The mailing address of Mortgagor and Mortgagee are
the addresses for those parties set forth or referred to in Section 7.10 below.

                          ARTICLE 1. GRANT OF MORTGAGE

         1.1      GRANT. For the purposes of and upon the terms and conditions
                  in this Mortgage and for good and valuable consideration, the
                  receipt and sufficiency of which are hereby acknowledged,
                  Mortgagor irrevocably grants, bargains, sells, conveys and
                  assigns to Mortgagee, with power of sale and right of entry
                  and possession, all of that real property located in the City
                  of Conway, County of Faulkner, State of Arkansas, described on
                  Exhibit A attached hereto, together with all right, title,
                  interest, and privileges of Mortgagor in and to all streets,
                  ways, roads, and alleys used in connection with or pertaining
                  to such real property, all development rights or credits, air
                  rights, water, water rights and water stock related to the
                  real property, and all minerals, oil and gas, and other
                  hydrocarbon substances in, on or under the real property, and
                  all appurtenances, easements, rights and rights of way
                  appurtenant or related thereto; all buildings, other
                  improvements and fixtures now or hereafter located on the real
                  property, including, but not limited to, all apparatus,
                  equipment, and appliances used in the operation or occupancy
                  of the real property, it being intended by the parties that
                  all such items shall be conclusively considered to be a part
                  of the real property, whether or not attached or affixed to
                  the real property (the "Improvements"); all interest or estate
                  which Mortgagor may hereafter acquire in the property
                  described above, and all additions and accretions thereto, and
                  the proceeds of any of the foregoing; (all of the foregoing
                  being collectively referred to as the "Subject Property"). The
                  listing of specific rights or property shall not be
                  interpreted as a limit of general terms.

         1.2      ADDRESS. The addresses of the Subject Property are (i) 1701
                  Sturgis Road, (ii) 900 Robbins Street, and (iii) 701 Bruce
                  Street. However, neither the failure to designate an address
                  nor any inaccuracy in the addresses designated shall affect
                  the validity or priority of the lien of this Mortgage on the
                  Subject Property as described on Exhibit A.

                                  Page 1 of 20

<PAGE>

                                                             Loan No. 8079119402

                         ARTICLE 2. OBLIGATIONS SECURED

         2.1      OBLIGATIONS SECURED. Mortgagor makes this Mortgage for the
                  purpose of securing the following obligations ("Secured
                  Obligations"):

                  (a)      Payment to Mortgagee of all sums at any time owing
                           under (i) that certain Revolving Line of Credit Note
                           of even date herewith in the principal amount of
                           Forty Five Million Dollars ($45,000,000) (the "Credit
                           Note"), and (ii) that certain Term Note of even date
                           herewith in the principal amount of Twelve Million
                           Five Hundred Thousand Dollars ($12,500,000) (the
                           "Term Note"; and, together with the Credit Note, the
                           "Notes") executed by VIRCO MFG. CORPORATION, a
                           Delaware corporation ("Borrower"), and payable to the
                           order of Mortgagee, as lender; and

                  (b)      Payment to Mortgagee of all sums representing Bank
                           Product Obligations, as defined in the Credit
                           Agreement referred to below; and

                  (c)      Payment and performance of all covenants and
                           obligations of Mortgagor under this Mortgage; and

                  (d)      Payment and performance of all covenants and
                           obligations on the part of Borrower under that
                           certain Amended and Restated Credit Agreement
                           ("Credit Agreement") of even date herewith by and
                           between Borrower and Mortgagee, as lender, and each
                           other Loan Document executed in connection therewith;
                           and

                  (e)      Payment and performance of all future advances and
                           other obligations that the then record owner of all
                           or part of the Subject Property may agree to pay
                           and/or perform (whether as principal, surety or
                           guarantor) for the benefit of Mortgagee, when such
                           future advance or obligation is evidenced by a
                           writing which recites that it is secured by this
                           Mortgage; and

                  (f)      All modifications, extensions and renewals of any of
                           the obligations secured hereby, however evidenced,
                           including, without limitation: (i) modifications of
                           the required principal payment dates or interest
                           payment dates or both, as the case may be, deferring
                           or accelerating payment dates wholly or partly; or
                           (ii) modifications, extensions or renewals at a
                           different rate of interest whether or not in the case
                           of a note, the modification, extension or renewal is
                           evidenced by a new or additional promissory note or
                           notes.

         2.2      OBLIGATIONS. The term "obligations" is used herein in its
                  broadest and most comprehensive sense and shall be deemed to
                  include, without limitation, all interest and charges,
                  prepayment charges (if any), late charges and loan fees at any
                  time accruing or assessed on any of the Secured Obligations,
                  including, without limitation, any interest or other payment
                  obligations that would have accrued on the Secured Obligations
                  but for the application of the United States Bankruptcy Code.

         2.3      INCORPORATION. All terms of the Secured Obligations and the
                  documents evidencing such obligations are incorporated herein
                  by this reference. All persons who may have or acquire an
                  interest in the Subject Property shall be deemed to have
                  notice of the terms of the Secured Obligations and to have
                  notice, if provided therein, that: (a) the Notes or the Credit
                  Agreement may permit borrowing, repayment and re-borrowing so
                  that repayments shall not reduce the amounts of the Secured
                  Obligations; and (b) the rate of interest on one or more
                  Secured Obligations may vary from time to time.

                    ARTICLE 3. ASSIGNMENT OF LEASES AND RENTS

         3.1      ASSIGNMENT. Mortgagor hereby irrevocably assigns to Mortgagee
                  all of Mortgagor's right, title and interest in, to and under:
                  (a) all leases of the Subject Property or any portion thereof,
                  and all other agreements of any kind relating to the use or
                  occupancy of the Subject Property or any portion thereof,
                  whether now existing or entered into after the date hereof
                  ("Leases"); and (b) the rents, revenue, income, issues,
                  deposits and profits of the Subject Property, including,
                  without limitation, all amounts payable and all rights and
                  benefits accruing to Mortgagor under the Leases ("Payments").
                  The term "Leases" shall also include all guarantees of and
                  security for the lessees' performance thereunder, and all
                  amendments,

                                  Page 2 of 20

<PAGE>

                                                             Loan No. 8079119402

                  extensions, renewals or modifications thereto which are
                  permitted hereunder. This is a present and absolute
                  assignment, not an assignment for security purposes only, and
                  Mortgagee's right to the Leases and Payments is not contingent
                  upon, and may be exercised without possession of, the Subject
                  Property.

         3.2      GRANT OF LICENSE. Mortgagee confers upon Mortgagor a license
                  ("License") to collect and retain the Payments as they become
                  due and payable, until the occurrence of a Default (as
                  hereinafter defined). Upon a Default, the License shall be
                  automatically revoked and Mortgagee may collect and apply the
                  Payments pursuant to Section 6.4 without notice and without
                  taking possession of the Subject Property. Mortgagor hereby
                  irrevocably authorizes and directs the lessees under the
                  Leases to rely upon and comply with any notice or demand by
                  Mortgagee for the payment to Mortgagee of any rental or other
                  sums which may at any time become due under the Leases, or for
                  the performance of any of the lessees' undertakings under the
                  Leases, and the lessees shall have no right or duty to inquire
                  as to whether any Default has actually occurred or is then
                  existing hereunder. Mortgagor hereby relieves the lessees from
                  any liability to Mortgagor by reason of relying upon and
                  complying with any such notice or demand by Mortgagee.

         3.3      EFFECT OF ASSIGNMENT. The foregoing irrevocable assignment
                  shall not cause Mortgagee to be: (a) a mortgagee in
                  possession; (b) responsible or liable for the control, care,
                  management or repair of the Subject Property or for performing
                  any of the terms, agreements, undertakings, obligations,
                  representations, warranties, covenants and conditions of the
                  Leases; or (c) responsible or liable for any waste committed
                  on the Subject Property by the lessees under any of the Leases
                  or any other parties; for any dangerous or defective condition
                  of the Subject Property; or for any negligence in the
                  management, upkeep, repair or control of the Subject Property
                  resulting in loss or injury or death to any lessee, licensee,
                  employee, invitee or other person. Mortgagee shall not
                  directly or indirectly be liable to Mortgagor or any other
                  person as a consequence of: (i) the exercise or failure to
                  exercise by Mortgagee, or any of its employees, agents,
                  contractors or subcontractors, any of the rights, remedies or
                  powers granted to Mortgagee hereunder; or (ii) the failure or
                  refusal of Mortgagee to perform or discharge any obligation,
                  duty or liability of Mortgagor arising under the Leases.

         3.4      REPRESENTATIONS AND WARRANTIES. Mortgagor represents and
                  warrants that: (a) the Schedule of Leases attached hereto as
                  Schedule 1 is, as of the date hereof, a true, accurate and
                  complete list of all Leases; (b) all existing Leases are in
                  full force and effect and are enforceable in accordance with
                  their respective terms, and no breach or default, or event
                  which would constitute a breach or default after notice or the
                  passage of time, or both, exists under any existing Leases on
                  the part of any party; (c) no rent or other payment under any
                  existing Lease has been paid by any lessee for more than one
                  (1) month in advance; and (d) none of the lessor's interests
                  under any of the Leases has been transferred or assigned.

         3.5      COVENANTS. Mortgagor covenants and agrees at Mortgagor's sole
                  cost and expense to: (a) perform the obligations of lessor
                  contained in the Leases and enforce by all available remedies
                  performance by the lessees of the obligations of the lessees
                  contained in the Leases; (b) give Mortgagee prompt written
                  notice of any default which occurs with respect to any of the
                  Leases, whether the default be that of the lessee or of the
                  lessor; (c) exercise Mortgagor's best efforts to keep all
                  portions of the Subject Property that are capable of being
                  leased at all times at rentals not less than the fair market
                  rental value; (d) deliver to Mortgagee fully executed,
                  counterpart original(s) of each and every Lease if requested
                  to do so; and (e) execute and record such additional
                  assignments of any Lease or specific subordinations (or
                  subordination, attornment and non-disturbance agreements
                  executed by the lessor and lessee) of any Lease to the
                  Mortgage, in form and substance acceptable to Mortgagee, as
                  Mortgagee may request. Mortgagor shall not, without
                  Mortgagee's prior written consent or as otherwise permitted by
                  any provision of the Credit Agreement: (i) enter into any
                  Leases after the date thereof; (ii) execute any other
                  assignment relating to any of the Leases; (iii) discount any
                  rent or other sums due under the Leases or collect the same in
                  advance, other than to collect rentals one (1) month in
                  advance of the time when it becomes due; (iv) terminate,
                  modify or amend any of the terms of the Leases or in any
                  manner release or discharge the lessees from any obligations
                  thereunder; (v) consent to any assignment or subletting by any
                  lessee; or (vi) subordinate or agree to subordinate any of the
                  Leases to any other Mortgage or encumbrance. Any such
                  attempted action in violation of the provisions of this
                  Section 3.5 shall be null and void. Without in any way
                  limiting the requirement of Mortgagee's consent hereunder, any
                  sums received by Mortgagor in consideration of any termination
                  (or the release or discharge

                                  Page 3 of 20

<PAGE>

                                                             Loan No. 8079119402

                  of any lessee) modification or amendment of any Lease shall be
                  applied to reduce the outstanding Secured Obligations and any
                  such sums received by Mortgagor shall be held in trust by
                  Mortgagor for such purpose.

         3.6      ESTOPPEL CERTIFICATES. Within thirty (30) days after written
                  request by Mortgagee, Mortgagor shall deliver to Mortgagee and
                  to any party designated by Mortgagee estoppel certificates
                  executed by Mortgagor and by each of the lessees, in
                  recordable form, certifying (if such be the case): (a) that
                  the foregoing assignment and the Leases are in full force and
                  effect; (b) the date of each lessee's most recent payment of
                  rent; (c) that there are no defenses or offsets outstanding,
                  or stating those claimed by Mortgagor or lessees under the
                  foregoing assignment or the Leases, as the case may be; and
                  (d) any other information reasonably requested by Mortgagee.

                ARTICLE 4. SECURITY AGREEMENT AND FIXTURE FILING

         4.1      SECURITY INTEREST. Mortgagor hereby grants and assigns to
                  Mortgagee as of the "Closing Date" (defined in the Credit
                  Agreement) a security interest, to secure payment and
                  performance of all of the Secured Obligations, in all of the
                  following described personal property in which Mortgagor now
                  or at any time hereafter has any interest (collectively, the
                  "Collateral"):

                           All goods, building and other materials, supplies,
                           inventory, work in process, equipment, machinery,
                           fixtures, furniture, furnishings, signs and other
                           personal property and embedded software included
                           therein and supporting information, wherever
                           situated, which are or are to be incorporated into,
                           used in connection with, or appropriated for use on
                           (i) the real property described on Exhibit A attached
                           hereto and incorporated by reference herein or (ii)
                           any existing or future improvements on the real
                           property (which real property and improvements are
                           collectively referred to herein as the "Subject
                           Property"); together with all rents and security
                           deposits derived from the Subject Property; all
                           inventory, accounts, cash receipts, deposit accounts,
                           accounts receivable, contract rights, licenses,
                           agreements, general intangibles, payment intangibles,
                           software, chattel paper (whether electronic or
                           tangible), instruments, documents, promissory notes,
                           drafts, letters of credit, letter of credit rights,
                           supporting obligations, insurance policies, insurance
                           and condemnation awards and proceeds, proceeds of the
                           sale of promissory notes, any other rights to the
                           payment of money, trade names, trademarks and service
                           marks arising from or related to the ownership,
                           management, leasing, operation, sale or disposition
                           of the Subject Property or any business now or
                           hereafter conducted thereon by Mortgagor; all
                           development rights and credits, and any and all
                           permits, consents, approvals, licenses,
                           authorizations and other rights granted by, given by
                           or obtained from, any governmental entity with
                           respect to the Subject Property; all water and water
                           rights, wells and well rights, canals and canal
                           rights, ditches and ditch rights, springs and spring
                           rights, and reservoirs and reservoir rights
                           appurtenant to or associated with the Subject
                           Property, whether decreed or undecreed, tributary,
                           non-tributary or not non-tributary, surface or
                           underground or appropriated or unappropriated, and
                           all shares of stock in water, ditch, lateral and
                           canal companies, well permits and all other evidences
                           of any of such rights; all deposits or other security
                           now or hereafter made with or given to utility
                           companies by Mortgagor with respect to the Subject
                           Property; all advance payments of insurance premiums
                           made by Mortgagor with respect to the Subject
                           Property; all plans, drawings and specifications
                           relating to the Subject Property; all loan funds held
                           by Mortgagee, whether or not disbursed; all funds
                           deposited with Mortgagee pursuant to any loan
                           agreement; all reserves, deferred payments, deposits,
                           accounts, refunds, cost savings and payments of any
                           kind related to the Subject Property or any portion
                           thereof; together with all replacements and proceeds
                           of, and additions and accessions to, any of the
                           foregoing; together with all books, records and files
                           relating to any of the foregoing.

                           As to all of the above described personal property
                           which is or which hereafter becomes a "fixture" under
                           applicable law, this Mortgage constitutes a fixture
                           filing under the Arkansas Uniform Commercial Code, as
                           amended or recodified from time to time ("UCC").

         4.2      REPRESENTATIONS AND WARRANTIES. Mortgagor represents and
                  warrants that: (a) Mortgagor has, or will have, good title to
                  the Collateral; (b) Mortgagor has not previously assigned or
                  encumbered the

                                  Page 4 of 20

<PAGE>

                                                             Loan No. 8079119402

                  Collateral, and no financing statement covering any of the
                  Collateral has been delivered to any other person or entity;
                  (c) Mortgagor's principal place of business is located at the
                  address shown in Section 7.10; and (d) Mortgagor's legal name
                  is exactly as set forth on the first page of this Mortgage and
                  all of Mortgagor's organizational documents or agreements
                  delivered to Mortgagee are complete and accurate in every
                  respect.

         4.3      COVENANTS. Mortgagor agrees: (a) to execute and deliver such
                  documents as Mortgagee deems necessary to create, perfect and
                  continue the security interests contemplated hereby; (b) not
                  to change its name, and as applicable, its chief executive
                  office, its principal residence or the jurisdiction in which
                  it is organized and/or registered without giving Mortgagee
                  prior written notice thereof; (c) to cooperate with Mortgagee
                  in perfecting all security interests granted herein and in
                  obtaining such agreements from third parties as Mortgagee
                  deems necessary, proper or convenient in connection with the
                  preservation, perfection or enforcement of any of its rights
                  hereunder; and (d) that Mortgagee is authorized to file
                  financing statements in the name of Mortgagor to perfect
                  Mortgagee's security interest in Collateral.

         4.4      RIGHTS OF MORTGAGEE. In addition to Mortgagee's rights as a
                  "Secured Party" under the UCC, Mortgagee may, but shall not be
                  obligated to, at any time without notice and at the expense of
                  Mortgagor: (a) give notice to any person of Mortgagee's rights
                  hereunder and enforce such rights at law or in equity; (b)
                  insure, protect, defend and preserve the Collateral or any
                  rights or interests of Mortgagee therein; (c) inspect the
                  Collateral; and (d) endorse, collect and receive any right to
                  payment of money owing to Mortgagor under or from the
                  Collateral. Notwithstanding the above, in no event shall
                  Mortgagee be deemed to have accepted any property other than
                  cash in satisfaction of any obligation of Mortgagor to
                  Mortgagee unless Mortgagee shall make an express written
                  election of said remedy under UCC Section 9-620, or other
                  applicable law.

         4.5      RIGHTS OF MORTGAGEE ON DEFAULT. Upon the occurrence of a
                  Default (hereinafter defined) under this Mortgage, then in
                  addition to all of Mortgagee's rights as a "Secured Party"
                  under the UCC or otherwise at law:

                  (a)      Mortgagee may (i) upon written notice, require
                           Mortgagor to assemble any or all of the Collateral
                           and make it available to Mortgagee at a place
                           designated by Mortgagee; (ii) without prior notice,
                           enter upon the Subject Property or other place where
                           any of the Collateral may be located and take
                           possession of, collect, sell, lease, license and
                           dispose of any or all of the Collateral, and store
                           the same at locations acceptable to Mortgagee at
                           Mortgagor's expense; (iii) sell, assign and deliver
                           at any place or in any lawful manner all or any part
                           of the Collateral and bid and become the purchaser at
                           any such sales;

                  (b)      Mortgagee may, for the account of Mortgagor and at
                           Mortgagor's expense: (i) operate, use, consume, sell,
                           lease, license or dispose of the Collateral as
                           Mortgagee deems appropriate for the purpose of
                           performing any or all of the Secured Obligations;
                           (ii) enter into any agreement, compromise, or
                           settlement, including insurance claims, which
                           Mortgagee may deem desirable or proper with respect
                           to any of the Collateral; and (iii) endorse and
                           deliver evidences of title for, and receive, enforce
                           and collect by legal action or otherwise, all
                           indebtedness and obligations now or hereafter owing
                           to Mortgagor in connection with or on account of any
                           or all of the Collateral; and

                  (c)      In disposing of Collateral hereunder, Mortgagee may
                           disclaim all warranties of title, possession, quiet
                           enjoyment and the like. Any proceeds of any
                           disposition of any Collateral may be applied by
                           Mortgagee to the payment of expenses incurred by
                           Mortgagee in connection with the foregoing, including
                           reasonable attorneys' fees, and the balance of such
                           proceeds may be applied by Mortgagee toward the
                           payment of the Secured Obligations in such order of
                           application as Mortgagee may from time to time elect.

                           Notwithstanding any other provision hereof, Mortgagee
                           shall not be deemed to have accepted any property
                           other than cash in satisfaction of any obligation of
                           Mortgagor to Mortgagee unless Mortgagor shall make an
                           express written election of said remedy under UCC ss.
                           9-620, or other applicable law. Mortgagor agrees that
                           Mortgagee shall have no obligation to process or
                           prepare any Collateral for sale or other disposition.

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                                                             Loan No. 8079119402

         4.6      POWER OF ATTORNEY. Mortgagor hereby irrevocably appoints
                  Mortgagee as Mortgagor's attorney-in-fact (such agency being
                  coupled with an interest), and as such attorney-in-fact
                  Mortgagee may, without the obligation to do so, in Mortgagee's
                  name, or in the name of Mortgagor, prepare, execute and file
                  or record financing statements, continuation statements,
                  applications for registration and like papers necessary to
                  create, perfect or preserve any of Mortgagee's security
                  interests and rights in or to any of the Collateral, and, upon
                  a Default hereunder, take any other action required of
                  Mortgagor; provided, however, that Mortgagee as such
                  attorney-in-fact shall be accountable only for such funds as
                  are actually received by Mortgagee.

         4.7      POSSESSION AND USE OF COLLATERAL. Except as otherwise provided
                  in this Section or the other Loan Documents (as defined in the
                  Credit Agreement), so long as no Default exists under this
                  Mortgage or any of the Loan Documents, Mortgagor may possess,
                  use, move, transfer or dispose of any of the Collateral in the
                  ordinary course of Mortgagor's business and in accordance with
                  the Credit Agreement.

                   ARTICLE 5. RIGHTS AND DUTIES OF THE PARTIES

         5.1      TITLE. Mortgagor represents and warrants that, except as
                  disclosed to Mortgagee in a writing which refers to this
                  warranty, Mortgagor lawfully holds and possesses fee simple
                  title to the Subject Property without limitation on the right
                  to encumber, and that this Mortgage is a first and prior lien
                  on the Subject Property.

         5.2      TAXES AND ASSESSMENTS. Subject to Mortgagor's rights to
                  contest payment of taxes as may be provided in the Credit
                  Agreement, Mortgagor shall pay prior to delinquency all taxes,
                  assessments, levies and charges imposed by any public or
                  quasi-public authority or utility company which are or which
                  may become a lien upon or cause a loss in value of the Subject
                  Property or any interest therein. Mortgagor shall also pay
                  prior to delinquency all taxes, assessments, levies and
                  charges imposed by any public authority upon Mortgagee by
                  reason of its interest in any Secured Obligation or in the
                  Subject Property, or by reason of any payment made to
                  Mortgagee pursuant to any Secured Obligation; provided,
                  however, Mortgagor shall have no obligation to pay taxes which
                  may be imposed from time to time upon Mortgagee and which are
                  measured by and imposed upon Mortgagee's net income.

         5.3      TAX AND INSURANCE IMPOUNDS. At any time following the
                  occurrence of a Default, at Mortgagee's option and upon its
                  demand, Mortgagor, shall, until all Secured Obligations have
                  been paid in full, pay to Mortgagee monthly, annually or as
                  otherwise directed by Mortgagee an amount estimated by
                  Mortgagee to be equal to: (a) all taxes, assessments, levies
                  and charges imposed by any public or quasi-public authority or
                  utility company which are or may become a lien upon the
                  Subject Property or Collateral and will become due for the tax
                  year during which such payment is so directed; and (b)
                  premiums for fire, hazard and insurance required or requested
                  pursuant to the Loan Documents when same are next due. If
                  Mortgagee determines that any amounts paid by Mortgagor are
                  insufficient for the payment in full of such taxes,
                  assessments, levies, charges and/or insurance premiums,
                  Mortgagee shall notify Mortgagor of the increased amounts
                  required to pay all amounts when due, whereupon Mortgagor
                  shall pay to Mortgagee within thirty (30) days thereafter the
                  additional amount as stated in Mortgagee's notice. All sums so
                  paid shall not bear interest, except to the extent and in any
                  minimum amount required by law; and Mortgagee shall, unless
                  Mortgagor is otherwise in Default hereunder or under any Loan
                  Document, apply said funds to the payment of, or at the sole
                  option of Mortgagee release said funds to Mortgagor for the
                  application to and payment of, such sums, taxes, assessments,
                  levies, charges, and insurance premiums. Upon Default by
                  Mortgagor hereunder or under any Secured Obligation, Mortgagee
                  may apply all or any part of said sums to any Secured
                  Obligation and/or to cure such Default, in which event
                  Mortgagor shall be required to restore all amounts so applied,
                  as well as to cure any other events or conditions of Default
                  not cured by such application. Upon assignment of this
                  Mortgage, Mortgagee shall have the right to assign all amounts
                  collected and in its possession to its assignee whereupon
                  Mortgagee shall be released from all liability with respect
                  thereto. Within ninety-five (95) days following full repayment
                  of the Secured Obligations (other than full repayment of the
                  Secured Obligations as a consequence of a foreclosure or
                  conveyance in lieu of foreclosure of the liens and security
                  interests securing the Secured Obligations) or at such earlier
                  time as Mortgagee may elect, the balance of all amounts
                  collected and in Mortgagee's possession shall be paid to
                  Mortgagor and no other party shall have any right or claim
                  thereto.

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                                                             Loan No. 8079119402

         5.4      PERFORMANCE OF SECURED OBLIGATIONS. Mortgagor shall promptly
                  pay and perform each Secured Obligation when due.

         5.5      LIENS, ENCUMBRANCES AND CHARGES. Mortgagor shall immediately
                  discharge any lien not approved by Mortgagee in writing that
                  has or may attain priority over this Mortgage. Subject to the
                  provisions of the Credit Agreement regarding mechanics' liens,
                  Mortgagor shall pay when due all obligations secured by or
                  which may become liens and encumbrances which shall now or
                  hereafter encumber or appear to encumber all or any part of
                  the Subject Property or Collateral, or any interest therein,
                  whether senior or subordinate hereto.

         5.6      DAMAGES; INSURANCE AND CONDEMNATION PROCEEDS.

                  (a)      The following (whether now existing or hereafter
                           arising) are all absolutely and irrevocably assigned
                           by Mortgagor to Mortgagee and, at the request of
                           Mortgagee, shall be paid directly to Mortgagee: (i)
                           all awards of damages and all other compensation
                           payable directly or indirectly by reason of a
                           condemnation or proposed condemnation for public or
                           private use affecting all or any part of, or any
                           interest in, the Subject Property or Collateral; (ii)
                           all other claims and awards for damages to, or
                           decrease in value of, all or any part of, or any
                           interest in, the Subject Property or Collateral;
                           (iii) all proceeds of any insurance policies (whether
                           or not expressly required by Mortgagee to be
                           maintained by Mortgagor, including, but not limited
                           to, earthquake insurance and terrorism insurance, if
                           any) payable by reason of loss sustained to all or
                           any part of the Subject Property or Collateral; and
                           (iv) all interest which may accrue on any of the
                           foregoing. Subject to applicable law, and without
                           regard to any requirement contained in Section
                           5.7(d), Mortgagee may at its discretion apply all or
                           any of the proceeds it receives to its expenses in
                           settling, prosecuting or defending any claim and may
                           apply the balance to the Secured Obligations in any
                           order acceptable to Mortgagee, and/or Mortgagee may
                           release all or any part of the proceeds to Mortgagor
                           upon any conditions Mortgagee may impose. Mortgagee
                           may commence, appear in, defend or prosecute any
                           assigned claim or action and may adjust, compromise,
                           settle and collect all claims and awards assigned to
                           Mortgagee; provided, however, in no event shall
                           Mortgagee be responsible for any failure to collect
                           any claim or award, regardless of the cause of the
                           failure, including, without limitation, any
                           malfeasance or nonfeasance by Mortgagee or its
                           employees or agents.

                  (b)      At its sole option, Mortgagee may permit insurance or
                           condemnation proceeds held by Mortgagee to be used
                           for repair or restoration but may condition such
                           application upon reasonable conditions, including,
                           without limitation: (i) the deposit with Mortgagee of
                           such additional funds which Mortgagee determines are
                           needed to pay all costs of the repair or restoration,
                           (including, without limitation, taxes, financing
                           charges, insurance and rent during the repair
                           period); (ii) the establishment of an arrangement for
                           lien releases and disbursement of funds acceptable to
                           Mortgagee; (iii) the delivery to Mortgagee of plans
                           and specifications for the work, a contract for the
                           work signed by a contractor acceptable to Mortgagee,
                           a cost breakdown for the work and a payment and
                           performance bond for the work, all of which shall be
                           acceptable to Mortgagee; and (iv) the delivery to
                           Mortgagee of evidence acceptable to Mortgagee (aa)
                           that after completion of the work the income from the
                           Subject Property will be sufficient to pay all
                           expenses and debt service for the Subject Property;
                           (bb) of the continuation of Leases acceptable to and
                           required by Mortgagee; (cc) that upon completion of
                           the work, the size, capacity and total value of the
                           Subject Property will be at least as great as it was
                           before the damage or condemnation occurred; (dd) that
                           there has been no material adverse change in the
                           financial condition or credit of Mortgagor since the
                           date of this Mortgage; and (ee) of the satisfaction
                           of any additional conditions that Mortgagee may
                           reasonably establish to protect its security.
                           Mortgagor hereby acknowledges that the conditions
                           described above are reasonable, and, if such
                           conditions have not been satisfied within thirty (30)
                           days of receipt by Mortgagee of such insurance or
                           condemnation proceeds, then Mortgagee may apply such
                           insurance or condemnation proceeds to pay the Secured
                           Obligations in such order and amounts as Mortgagee in
                           its sole discretion may choose.

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                                                             Loan No. 8079119402

         5.7      INSURANCE, MAINTENANCE AND PRESERVATION OF THE SUBJECT
                  PROPERTY. Subject to the provisions of the Credit Agreement,
                  while any obligation of Mortgagor or any guarantor under any
                  Loan Document remains outstanding, Mortgagor covenants:

                  (a)      to maintain at Mortgagor's sole expense, with
                           licensed insurers approved by Mortgagee, the
                           following policies of insurance in form and substance
                           satisfactory to Mortgagee, with Mortgagee named as
                           first mortgagee on all such policies: (i) title
                           insurance (including a Title Policy, together with
                           any endorsements which Mortgagee may require,
                           insuring Mortgagee in the principal amount of the
                           Notes), (ii) property insurance (including, without
                           limitation, such endorsements as Mortgagee may
                           require, insuring Mortgagee against damage to the
                           Subject Property in an amount acceptable to
                           Mortgagee, with Mortgagee named on the policy under a
                           Lender's Loss Payable Endorsement), (iii) flood
                           hazard insurance, as required by applicable
                           governmental regulations, or as deemed necessary by
                           Mortgagee, (iv) liability insurance (including a
                           policy of comprehensive general liability insurance)
                           with limits as required by Mortgagee, insuring
                           against liability for injury and/or death to any
                           person and/or damage to any property occurring on the
                           Subject Property and/or from any cause whatsoever.
                           Mortgagor shall provide to Mortgagee the originals of
                           all required insurance policies, or other evidence of
                           insurance acceptable to Mortgagee. All insurance
                           policies shall provide that the insurance shall not
                           be cancelable or materially changed without thirty
                           (30) days' prior written notice to Mortgagee.
                           Mortgagee shall be named under a Lender's Loss
                           Payable Endorsement (form #438BFU or equivalent) on
                           all insurance policies which Mortgagor actually
                           maintains with respect to the Property. Mortgagor
                           shall provide to Mortgagee evidence of any other
                           hazard insurance Mortgagee may deem necessary at any
                           time during the loan secured by this Mortgage;

                  (b)      to keep the Subject Property and Collateral in good
                           condition and repair;

                  (c)      not to remove or demolish the Subject Property or
                           Collateral or any part thereof, not to alter, restore
                           or add to the Subject Property or Collateral (except
                           in the ordinary course of business) and not to
                           initiate or acquiesce in any change in any zoning or
                           other land classification which affects the Subject
                           Property without the Mortgagee's prior written
                           consent;

                  (d)      in the event of any damage or other casualty relating
                           to the Subject Property or the Collateral and so long
                           as Mortgagee has released any insurance claim
                           proceeds relating thereto in accordance with Section
                           5.6 hereof, to complete or restore promptly and in
                           good and workmanlike manner the Subject Property and
                           Collateral, or any part thereof which may be damaged
                           or destroyed;

                  (e)      to comply with all laws, ordinances, regulations and
                           standards, and all covenants, conditions,
                           restrictions and equitable servitudes, whether public
                           or private, of every kind and character which affect
                           the Subject Property or Collateral and pertain to
                           acts committed or conditions existing thereon,
                           including, without limitation, any work, alteration,
                           improvement or demolition mandated by such laws,
                           covenants or requirements;

                  (f)      not to commit or permit waste of the Subject Property
                           or Collateral; and

                  (g)      to do all other acts which from the character or use
                           of the Subject Property or Collateral may be
                           reasonably necessary to maintain and preserve its
                           value.

         5.8      INTENTIONALLY OMITTED.

         5.9      APPROVAL OF LEASES. All leases of all or any part of the
                  Subject Property shall: (a) be upon terms and with tenants
                  approved by Mortgagee prior to Mortgagor's execution of any
                  such lease; and (b) include estoppel, subordination,
                  attornment and mortgagee protection provisions satisfactory to
                  Mortgagee. All standard lease forms and any material deviation
                  from any form, shall be approved by Mortgagee prior to
                  execution of any lease using such form.

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                                                             Loan No. 8079119402

         5.10     DEFENSE AND NOTICE OF LOSSES, CLAIMS AND ACTIONS. At
                  Mortgagor's sole expense, Mortgagor shall protect, preserve
                  and defend the Subject Property and Collateral and title to
                  and right of possession of the Subject Property and
                  Collateral, the security hereof and the rights and powers of
                  Mortgagee hereunder against all adverse claims. Mortgagor
                  shall give Mortgagee prompt notice in writing of the assertion
                  of any claim, of the filing of any action or proceeding, of
                  the occurrence of any damage to the Subject Property or
                  Collateral and of any condemnation offer or action.

         5.11     CERTAIN POWERS OF MORTGAGEE.

                  (a)      From time to time and without affecting the personal
                           liability of any person for payment of any
                           indebtedness or performance of any obligations
                           secured hereby, Mortgagee may, without liability
                           therefor and without notice: (a) release from the
                           lien of this Mortgage all or any part of the Subject
                           Property; (b) consent to the making of any map or
                           plat thereof; and (c) join in any grant of easement
                           thereon, any declaration of covenants and
                           restrictions, or any extension agreement or any
                           agreement subordinating the lien or charge of this
                           Mortgage.

                  (b)      Except as may be required by applicable law,
                           Mortgagee may from time to time apply to any court of
                           competent jurisdiction for aid and direction in the
                           enforcement of the rights and remedies available
                           hereunder, and may obtain orders or decrees directing
                           or confirming or approving the enforcement of said
                           remedies.

                  (c)      INTENTIONALLY OMITTED.

                  (d)      INTENTIONALLY OMITTED.

                  (e)      INTENTIONALLY OMITTED.

                  (f)      INTENTIONALLY OMITTED.

                  (g)      INTENTIONALLY OMITTED.

         5.12     COMPENSATION; EXCULPATION; INDEMNIFICATION.

                  (a)      Mortgagor shall pay to Mortgagee reasonable
                           compensation for services rendered concerning this
                           Mortgage, including without limit any statement of
                           amounts owing under any Secured Obligation. Mortgagee
                           shall not directly or indirectly be liable to
                           Mortgagor or any other person as a consequence of (i)
                           the exercise of the rights, remedies or powers
                           granted to Mortgagee in this Mortgage; (ii) the
                           failure or refusal of Mortgagee to perform or
                           discharge any obligation or liability of Mortgagor
                           under any agreement related to the Subject Property
                           or Collateral or under this Mortgage; or (iii) any
                           loss sustained by Mortgagor or any third party
                           resulting from Mortgagee's failure (whether by
                           malfeasance, nonfeasance or refusal to act) to lease
                           the Subject Property after a Default (hereinafter
                           defined) or from any other act or omission
                           (regardless of whether same constitutes negligence)
                           of Mortgagee in managing the Subject Property after a
                           Default unless the loss is caused by the gross
                           negligence or willful misconduct of Mortgagee and no
                           such liability shall be asserted against or imposed
                           upon Mortgagee, and all such liability is hereby
                           expressly waived and released by Mortgagor.

                  (b)      MORTGAGOR INDEMNIFIES MORTGAGEE AGAINST, AND HOLDS
                           MORTGAGEE HARMLESS FROM, ALL LOSSES, DAMAGES,
                           LIABILITIES, CLAIMS, CAUSES OF ACTION, JUDGMENTS,
                           COURT COSTS, ATTORNEYS' FEES AND OTHER LEGAL
                           EXPENSES, COST OF EVIDENCE OF TITLE, COST OF EVIDENCE
                           OF VALUE, AND OTHER EXPENSES WHICH IT MAY SUFFER OR
                           INCUR: (I) BY REASON OF THIS MORTGAGE; (II) BY REASON
                           OF THE EXECUTION OF THIS MORTGAGE OR IN PERFORMANCE
                           OF ANY ACT REQUIRED OR PERMITTED HEREUNDER OR BY LAW;
                           (III) AS A RESULT OF ANY FAILURE OF MORTGAGOR TO
                           PERFORM MORTGAGOR'S OBLIGATIONS; OR (IV) BY REASON OF
                           ANY ALLEGED OBLIGATION OR

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                                                             Loan No. 8079119402

                           UNDERTAKING ON MORTGAGEE'S PART TO PERFORM OR
                           DISCHARGE ANY OF THE REPRESENTATIONS, WARRANTIES,
                           CONDITIONS, COVENANTS OR OTHER OBLIGATIONS CONTAINED
                           IN ANY OTHER DOCUMENT RELATED TO THE SUBJECT
                           PROPERTY. THE ABOVE OBLIGATION OF MORTGAGOR TO
                           INDEMNIFY AND HOLD HARMLESS MORTGAGEE SHALL SURVIVE
                           THE RELEASE AND CANCELLATION OF THE SECURED
                           OBLIGATIONS AND THE RELEASE OR PARTIAL RELEASE OF
                           THIS MORTGAGE.

                  (c)      Mortgagor shall pay all amounts and indebtedness
                           arising under this Section 5.12 immediately upon
                           demand by Mortgagee together with interest thereon
                           from the date the indebtedness arises at the rate of
                           interest then applicable to the principal balance of
                           the Notes as specified therein.

         5.13     INTENTIONALLY OMITTED.

         5.14     DUE ON SALE OR ENCUMBRANCE. If the Subject Property or any
                  interest therein shall be sold, transferred (including,
                  without limitation, through sale or transfer of a majority or
                  controlling interest of the corporate stock or general
                  partnership interests or limited liability company interests
                  of Mortgagor), mortgaged, assigned, further encumbered or
                  leased, whether directly or indirectly, whether voluntarily,
                  involuntarily or by operation of law, without the prior
                  written consent of Mortgagee, THEN Mortgagee, in its sole
                  discretion, may declare all Secured Obligations immediately
                  due and payable.

         5.15     RELEASES, EXTENSIONS, MODIFICATIONS AND ADDITIONAL SECURITY.
                  Without notice to or the consent, approval or agreement of any
                  persons or entities having any interest at any time in the
                  Subject Property and Collateral or in any manner obligated
                  under the Secured Obligations ("Interested Parties"),
                  Mortgagee may, from time to time, release any person or entity
                  from liability for the payment or performance of any Secured
                  Obligation, take any action or make any agreement extending
                  the maturity or otherwise altering the terms or increasing the
                  amount of any Secured Obligation, or accept additional
                  security or release all or a portion of the Subject Property
                  and Collateral and other security for the Secured Obligations.
                  None of the foregoing actions shall release or reduce the
                  personal liability of any of said Interested Parties, or
                  release or impair the priority of the lien of and security
                  interests created by this Mortgage upon the Subject Property
                  and Collateral.

         5.16     INTENTIONALLY OMITTED.

         5.17     SUBROGATION. Mortgagee shall be subrogated to the lien of all
                  encumbrances, whether released of record or not, paid in whole
                  or in part by Mortgagee pursuant to the Loan Documents or by
                  the proceeds of any loan secured by this Mortgage.

         5.18     RIGHT OF INSPECTION. Mortgagee, its agents and employees, may
                  enter the Subject Property at any reasonable time for the
                  purpose of inspecting the Subject Property and Collateral and
                  ascertaining Mortgagor's compliance with the terms hereof.

         5.19     INTENTIONALLY OMITTED.

         5.20     HAZARDOUS MATERIALS. Mortgagor agrees as follows:

                  (a)      NO HAZARDOUS ACTIVITIES. Mortgagor shall not cause or
                           permit the Subject Property to be used as a site for
                           the use, generation, manufacture, storage, treatment,
                           release, discharge, disposal, transportation or
                           presence of any "hazardous substances," "hazardous
                           wastes," "hazardous materials," "toxic substances,"
                           "wastes," "regulated substances," "industrial solid
                           wastes," or "pollutants" under the Hazardous
                           Materials Laws, as described below, and/or other
                           applicable environmental laws, ordinances and
                           regulations (collectively, the "Hazardous
                           Materials"). "Hazardous Materials" shall not include
                           commercially reasonable amounts of such materials
                           used in the ordinary course of operation of the
                           Property which are used and stored in accordance with
                           all applicable environmental laws, ordinances and
                           regulations. "Hazardous Materials Laws" are defined
                           as laws, ordinances and regulations relating to
                           Hazardous Materials, including, without limitation:
                           the Clean Air Act, as amended, 42 U.S.C. Section 7401
                           et seq.; the Federal Water Pollution Control

                                 Page 10 of 20

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                                                             Loan No. 8079119402

                           Act, as amended, 33 U.S.C. Section 1251 et seq.; the
                           Resource Conservation and Recovery Act of 1976, as
                           amended, 42 U.S.C. Section 6901 et seq.; the
                           Comprehensive Environment Response, Compensation and
                           Liability Act of 1980, as amended (including the
                           Superfund Amendments and Reauthorization Act of 1986,
                           "CERCLA"), 42 U.S.C. Section 9601 et seq.; the Toxic
                           Substances Control Act, as amended, 15 U.S.C. Section
                           2601 et seq.; the Occupational Safety and Health Act,
                           as amended, 29 U.S.C. Section 651, the Emergency
                           Planning and Community Right-to-Know Act of 1986, 42
                           U.S.C. Section 11001 et seq.; the Mine Safety and
                           Health Act of 1977, as amended, 30 U.S.C. Section 801
                           et seq.; the Safe Drinking Water Act, as amended, 42
                           U.S.C. Section 300f et seq.; and all comparable state
                           and local laws, laws of other jurisdictions or orders
                           and regulations.

                  (b)      COMPLIANCE. Mortgagor shall comply and cause the
                           Subject Property to comply with all Hazardous
                           Materials Laws.

                  (c)      NOTICES. Mortgagor shall immediately notify Mortgagee
                           in writing of: (i) the discovery of any Hazardous
                           Materials on, under or about the Property; (ii) any
                           knowledge by Mortgagor that the Property does not
                           comply with any Hazardous Materials Laws; and (iii)
                           any claims or actions ("Hazardous Materials Claims")
                           pending or threatened against Mortgagor or the
                           Property by any governmental entity or agency or by
                           any other person or entity relating to Hazardous
                           Materials or pursuant to the Hazardous Materials
                           Laws.

                  (d)      REMEDIAL ACTION. In response to the presence of any
                           Hazardous Materials on, under or about the Property,
                           Mortgagor shall immediately take, at Mortgagor's sole
                           expense, all remedial action required by any
                           Hazardous Materials Laws or any judgment, consent
                           decree, settlement or compromise in respect to any
                           Hazardous Materials Claims.

         5.21     HAZARDOUS MATERIALS INDEMNITY. MORTGAGOR HEREBY AGREES TO
                  DEFEND, INDEMNIFY AND HOLD HARMLESS MORTGAGEE, ITS DIRECTORS,
                  OFFICERS, EMPLOYEES, AGENTS, SUCCESSORS AND ASSIGNS FROM AND
                  AGAINST ANY AND ALL LOSSES, DAMAGES, LIABILITIES, CLAIMS,
                  ACTIONS, JUDGMENTS, COURT COSTS AND LEGAL OR OTHER EXPENSES
                  (INCLUDING, WITHOUT LIMITATION, ATTORNEYS' FEES AND EXPENSES)
                  WHICH MORTGAGEE MAY INCUR AS A DIRECT OR INDIRECT CONSEQUENCE
                  OF THE USE, GENERATION, MANUFACTURE, STORAGE, DISPOSAL,
                  THREATENED DISPOSAL, TRANSPORTATION OR PRESENCE OF HAZARDOUS
                  MATERIALS IN, ON, UNDER OR ABOUT THE PROPERTY. MORTGAGOR SHALL
                  IMMEDIATELY PAY TO MORTGAGEE UPON DEMAND ANY AMOUNTS OWING
                  UNDER THIS INDEMNITY, TOGETHER WITH INTEREST FROM THE DATE THE
                  INDEBTEDNESS ARISES UNTIL PAID AT THE RATE OF INTEREST
                  APPLICABLE TO THE PRINCIPAL BALANCE OF THE NOTES. MORTGAGOR'S
                  DUTY AND OBLIGATIONS TO DEFEND, INDEMNIFY AND HOLD HARMLESS
                  MORTGAGEE SHALL SURVIVE THE CANCELLATION OF THE NOTES AND THE
                  RELEASE, OR PARTIAL RELEASE OF THIS MORTGAGE.

         5.22     LEGAL EFFECT OF SECTION. Mortgagor and Mortgagee agree that
                  Mortgagor's duty to indemnify Mortgagee hereunder shall
                  survive: (a) any judicial or non-judicial foreclosure under
                  this Mortgage, or transfer of the Subject Property in lieu
                  thereof, (b) the release or cancellation of this Mortgage; and
                  (c) the satisfaction of all of Mortgagor's obligation under
                  the Loan Documents.

                          ARTICLE 6. DEFAULT PROVISIONS

         6.1      DEFAULT. For all purposes hereof, the term "Default" shall
                  mean (a) at Mortgagee's option, the failure of Mortgagor to
                  make any payment of principal or interest on the Notes or to
                  pay any other amount due hereunder or under the Notes when the
                  same is due and payable, whether at maturity, by acceleration
                  or otherwise; (b) the failure of Mortgagor to perform any
                  non-monetary obligation hereunder, or the failure to be true
                  of any representation or warranty of Mortgagor contained
                  herein and the continuance of such failure for ten (10) days
                  after notice, or within any longer grace period, if any,
                  allowed in the Credit Agreement for such failure, (c) the
                  condemnation, seizure or appropriation of, or occurrence of an
                  uninsured casualty with

                                 Page 11 of 20

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                                                             Loan No. 8079119402

                  respect to any material portion of the Subject Property; (d)
                  the sequestration or attachment of, or any levy or execution
                  upon any of the Subject Property, which sequestration,
                  attachment, levy or execution is not released, expunged or
                  dismissed prior to the earlier of thirty (30) days or the sale
                  of the assets affected thereby; (e) the failure at any time of
                  this Mortgage to be a valid first lien upon the Subject
                  Property or any portion thereof, other than as a result of any
                  release of the Mortgage with respect to all or any portion of
                  the Subject Property pursuant to the terms and conditions of
                  the Credit Agreement; (f) the discovery of any Hazardous
                  Materials, which in Mortgagee's sole discretion, have a
                  materially adverse impact on the value of the Subject
                  Property, in, on or about the Subject Property subsequent to
                  the Closing Date, as defined in the Credit Agreement; or (g)
                  the existence of any Default as defined in the Credit
                  Agreement.

         6.2      RIGHTS AND REMEDIES. At any time after Default, Mortgagee
                  shall have all the following rights and remedies:

                  (a)      With or without notice, to declare all Secured
                           Obligations immediately due and payable.

                  (b)      With or without notice, and without releasing
                           Mortgagor from any Secured Obligation, and without
                           becoming a mortgagee in possession, to cure any
                           breach or Default of Mortgagor and, in connection
                           therewith, to enter upon the Subject Property and do
                           such acts and things as Mortgagee deems necessary or
                           desirable to protect the security hereof, including,
                           without limitation: (i) to appear in and defend any
                           action or proceeding purporting to affect the
                           security of this Mortgage or the rights or powers of
                           Mortgagee under this Mortgage; (ii) to pay, purchase,
                           contest or compromise any encumbrance, charge, lien
                           or claim of lien which, in the sole judgment of
                           Mortgagee, is or may be senior in priority to this
                           Mortgage, the judgment of Mortgagee being conclusive
                           as between the parties hereto; (iii) to obtain
                           insurance; (iv) to pay any premiums or charges with
                           respect to insurance required to be carried under
                           this Mortgage; or (v) to employ counsel, accountants,
                           contractors and other appropriate persons.

                  (c)      To commence and maintain an action or actions in any
                           court of competent jurisdiction to foreclose this
                           instrument as a mortgage or to obtain specific
                           enforcement of the covenants of Mortgagor hereunder,
                           and Mortgagor agrees that such covenants shall be
                           specifically enforceable by injunction or any other
                           appropriate equitable remedy and that for the
                           purposes of any suit brought under this subparagraph,
                           Mortgagor waives the defense of laches and any
                           applicable statute of limitations.

                  (d)      To the fullest extent permitted by law, to seek
                           non-judicial foreclosure pursuant to Ark. Code Ann.
                           Section 18-50-101, et seq.

                  (e)      To apply to a court of competent jurisdiction for and
                           obtain appointment of a receiver of the Subject
                           Property as a matter of strict right and without
                           regard to the adequacy of the security for the
                           repayment of the Secured Obligations, the existence
                           of a declaration that the Secured Obligations are
                           immediately due and payable, or the filing of a
                           notice of default, and Mortgagor hereby consents to
                           such appointment.

                  (f)      To enter upon, possess, manage and operate the
                           Subject Property or any part thereof, to take and
                           possess all documents, books, records, papers and
                           accounts of Mortgagor or the then owner of the
                           Subject Property, to make, terminate, enforce or
                           modify Leases of the Subject Property upon such terms
                           and conditions as Mortgagee deems proper, to make
                           repairs, alterations and improvements to the Subject
                           Property as necessary, in Mortgagee's sole judgment,
                           to protect or enhance the security hereof.

                  (g)      To give such notice of such Default and of its
                           election to cause the Subject Property to be sold as
                           may be required by law or as may be necessary to
                           cause the Mortgagee to exercise the power of sale
                           granted herein. As a condition precedent to any such
                           sale, Mortgagee shall give and record such notice as
                           the law then requires. When the minimum period of
                           time required by law after such notice has elapsed,
                           Mortgagee, without notice to or demand upon Mortgagor
                           except as required by law, shall sell the Subject
                           Property at the time and place of sale fixed by it in
                           the notice of sale, at one or several sales, either
                           as a whole or in separate parcels and in such manner
                           and order, as deemed

                                 Page 12 of 20

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                                                             Loan No. 8079119402

                           advisable by Mortgagee, or by Mortgagor to the extent
                           required by law, at public auction to the highest
                           bidder for cash, in lawful money of the United
                           States, payable at time of sale. Except as required
                           by law, neither Mortgagor nor any other person or
                           entity other than Mortgagee shall have the right to
                           direct the order in which the Subject Property is
                           sold. Subject to requirements and limits imposed by
                           law, Mortgagee may from time to time postpone sale of
                           all or any portion of the Subject Property by public
                           announcement at such time and place of sale.
                           Mortgagee shall deliver to the purchaser at such sale
                           a deed conveying the Subject Property or portion
                           thereof so sold, but without any covenant or
                           warranty, express or implied. The recitals in the
                           deed of any matters or facts shall be conclusive
                           proof of the truthfulness thereof. Any person,
                           including Mortgagor or Mortgagee may purchase at the
                           sale. Mortgagor hereby expressly waives any right of
                           redemption, including any rights under the Act passed
                           by the Arkansas General Assembly on May 8, 1899, and
                           all acts amendatory or in replacement thereof or
                           supplemental thereto.

                  (h)      To resort to and realize upon the security hereunder
                           and any other security now or later held by Mortgagee
                           concurrently or successively and in one or several
                           consolidated or independent judicial actions or
                           lawfully taken non-judicial proceedings, or both, and
                           to apply the proceeds received upon the Secured
                           Obligations all in such order and manner as Mortgagee
                           determines in its sole discretion.

                  (i)      Upon sale of the Subject Property at any judicial or
                           non-judicial foreclosure, Mortgagee may credit bid
                           (as determined by Mortgagee in its sole and absolute
                           discretion) all or any portion of the Secured
                           Obligations. In determining such credit bid,
                           Mortgagee may, but is not obligated to, take into
                           account all or any of the following: (i) appraisals
                           of the Subject Property as such appraisals may be
                           discounted or adjusted by Mortgagee in its sole and
                           absolute underwriting discretion; (ii) expenses and
                           costs incurred by Mortgagee with respect to the
                           Subject Property prior to foreclosure; (iii) expenses
                           and costs which Mortgagee anticipates will be
                           incurred with respect to the Subject Property after
                           foreclosure, but prior to resale, including, without
                           limitation, costs of structural reports and other due
                           diligence, costs to carry the Subject Property prior
                           to resale, costs of resale (e.g. commissions,
                           attorneys' fees, and taxes), costs of any hazardous
                           materials clean-up and monitoring, costs of deferred
                           maintenance, repair, refurbishment and retrofit,
                           costs of defending or settling litigation affecting
                           the Subject Property, and lost opportunity costs (if
                           any), including the time value of money during any
                           anticipated holding period by Mortgagee; (iv)
                           declining trends in real property values generally
                           and with respect to properties similar to the Subject
                           Property; (v) anticipated discounts upon resale of
                           the Subject Property as a distressed or foreclosed
                           property; (vi) the fact of additional collateral (if
                           any), for the Secured Obligations; and (vii) such
                           other factors or matters that Mortgagee (in its sole
                           and absolute discretion) deems appropriate. In regard
                           to the above, Mortgagor acknowledges and agrees that:
                           (w) Mortgagee is not required to use any or all of
                           the foregoing factors to determine the amount of its
                           credit bid; (x) this Section does not impose upon
                           Mortgagee any additional obligations that are not
                           imposed by law at the time the credit bid is made;
                           (y) the amount of Mortgagee's credit bid need not
                           have any relation to any loan-to-value ratios
                           specified in the Loan Documents or previously
                           discussed between Mortgagor and Mortgagee; and (z)
                           Mortgagee's credit bid may be (at Mortgagee's sole
                           and absolute discretion) higher or lower than any
                           appraised value of the Subject Property.

                  (j)      Upon the completion of any foreclosure sale of all or
                           a portion of the Subject Property, commence an action
                           to recover any of the Secured Obligations that
                           remains unpaid or unsatisfied.

         6.3      APPLICATION OF FORECLOSURE SALE PROCEEDS. Except as may be
                  otherwise required by applicable law, after deducting all
                  costs, fees and expenses including, without limitation, cost
                  of evidence of title and attorneys' fees in connection with
                  sale and costs and expenses of sale and of any judicial
                  proceeding wherein such sale may be made, all proceeds of any
                  foreclosure sale shall be applied: (a) to payment of all sums
                  expended by Mortgagee under the terms hereof and not then
                  repaid, with accrued interest at four percent (4%) above the
                  Prime Rate in effect from time to time; (b) to payment of all
                  other Secured Obligations; and (c) the remainder, if any, to
                  the person or persons legally entitled thereto. As used
                  herein, the term "Prime Rate" means at any time the rate of
                  interest most recently announced within Wells Fargo Bank,
                  National Association ("WFB") at its principal office, as its
                  Prime Rate, with the understanding that the Prime Rate is one
                  of WFB's base rates and serves as the basis upon which
                  effective rates of interest

                                 Page 13 of 20

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                                                             Loan No. 8079119402

                  are calculated for those loans making reference thereto, and
                  is evidenced by the recording thereof after its announcement
                  in such internal publication or publications as WFB may
                  designate.

         6.4      APPLICATION OF OTHER SUMS. All sums received by Mortgagee
                  under Section 6.2 or Section 3.2, less all costs and expenses
                  incurred by Mortgagee or any receiver under Section 6.2 or
                  Section 3.2, including, without limitation, attorneys' fees,
                  shall be applied in payment of the Secured Obligations in such
                  order as Mortgagee shall determine in its sole discretion;
                  provided, however, Mortgagee shall have no liability for funds
                  not actually received by Mortgagee.

         6.5      NO CURE OR WAIVER. Neither Mortgagee's nor any receiver's
                  entry upon and taking possession of all or any part of the
                  Subject Property and Collateral, nor any collection of rents,
                  issues, profits, insurance proceeds, condemnation proceeds or
                  damages, other security or proceeds of other security, or
                  other sums, nor the application of any collected sum to any
                  Secured Obligation, nor the exercise or failure to exercise of
                  any other right or remedy by Mortgagee or any receiver shall
                  cure or waive any breach, Default or notice of default under
                  this Mortgage, or nullify the effect of any notice of default
                  or sale (unless all Secured Obligations then due have been
                  paid and performed and Mortgagor has cured all other
                  defaults), or impair the status of the security, or prejudice
                  Mortgagee in the exercise of any right or remedy, or be
                  construed as an affirmation by Mortgagee of any tenancy, lease
                  or option or a subordination of the lien of or security
                  interests created by this Mortgage.

         6.6      PAYMENT OF COSTS, EXPENSES AND ATTORNEYS' FEES. Mortgagor
                  agrees to pay to Mortgagee immediately and without demand all
                  costs and expenses incurred by Mortgagee pursuant to Section
                  6.2 (including, without limitation, court costs and attorneys'
                  fees, whether incurred in litigation or not) with interest
                  from the date of expenditure until said sums have been paid at
                  the rate of interest then applicable to the principal balance
                  of the Notes as specified therein. In the event of any legal
                  proceedings, court costs and attorneys' fees shall be set by
                  the court and not by jury and shall be included in any
                  judgment obtained by Mortgagee.

         6.7      POWER TO FILE NOTICES AND CURE DEFAULTS. Mortgagor hereby
                  irrevocably appoints Mortgagee and its successors and assigns,
                  as its attorney-in-fact, which agency is coupled with an
                  interest, (a) to execute and/or record any notices of
                  completion, cessation of labor, or any other notices that
                  Mortgagee deems appropriate to protect Mortgagee's interest,
                  (b) upon the issuance of a deed pursuant to the foreclosure of
                  the lien of this Mortgage or the delivery of a deed in lieu of
                  foreclosure, to execute all instruments of assignment or
                  further assurance with respect to the Subject Property and
                  Collateral, Leases and Payments in favor of the grantee of any
                  such deed, as may be necessary or desirable for such purpose,
                  (c) to prepare, execute and file or record financing
                  statements, continuation statements, applications for
                  registration and like papers necessary to create, perfect or
                  preserve Mortgagee's security interests and rights in or to
                  any of the Subject Property and Collateral, and (d) upon the
                  occurrence of an event, act or omission which, with notice or
                  passage of time or both, would constitute a Default, Mortgagee
                  may perform any obligation of Mortgagor hereunder; provided,
                  however, that: (i) Mortgagee as such attorney-in-fact shall
                  only be accountable for such funds as are actually received by
                  Mortgagee; and (ii) Mortgagee shall not be liable to Mortgagor
                  or any other person or entity for any failure to act (whether
                  such failure constitutes negligence) by Mortgagee under this
                  Section.

         6.8      REMEDIES CUMULATIVE. All rights and remedies of Mortgagee
                  provided hereunder are cumulative and are in addition to all
                  rights and remedies provided by applicable law (including
                  specifically that of foreclosure of this instrument as though
                  it were a mortgage) or in any other agreements between
                  Mortgagor and Mortgagee. No failure on the part of Mortgagee
                  to exercise any of its rights hereunder arising upon any
                  Default shall be construed to prejudice its rights upon the
                  occurrence of any other or subsequent Default. No delay on the
                  part of Mortgagee in exercising any such rights shall be
                  construed to preclude it from the exercise thereof at any time
                  while that Default is continuing. Mortgagee may enforce any
                  one or more remedies or rights hereunder successively or
                  concurrently. By accepting payment or performance of any of
                  the Secured Obligations after its due date, Mortgagee shall
                  not thereby waive the agreement contained herein that time is
                  of the essence, nor shall Mortgagee waive either its right to
                  require prompt payment or performance when due of the reminder
                  of the Secured Obligations or its right to consider the
                  failure to so pay or perform a Default.

                                 Page 14 of 20

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                                                             Loan No. 8079119402

                       ARTICLE 7. MISCELLANEOUS PROVISIONS

         7.1      ADDITIONAL PROVISIONS. The Loan Documents contain or
                  incorporate by reference the entire agreement of the parties
                  with respect to matters contemplated herein and supersede all
                  prior negotiations. The Loan Documents grant further rights to
                  Mortgagee and contain further agreements and affirmative and
                  negative covenants by Mortgagor which apply to this Mortgage
                  and to the Subject Property and Collateral and such further
                  rights and agreements are incorporated herein by this
                  reference.

         7.2      MERGER. No merger shall occur as a result of Mortgagee's
                  acquiring any other estate in, or any other lien on, the
                  Subject Property unless Mortgagee consents to a merger in
                  writing.

         7.3      OBLIGATIONS OF MORTGAGOR, JOINT AND SEVERAL. If more than one
                  person has executed this Mortgage as "Mortgagor", the
                  obligations of all such persons hereunder shall be joint and
                  several.

         7.4      WAIVER OF MARSHALLING RIGHTS. Mortgagor, for itself and for
                  all parties claiming through or under Mortgagor, and for all
                  parties who may acquire a lien on or interest in the Subject
                  Property and Collateral, hereby waives all rights to have the
                  Subject Property and Collateral and/or any other property,
                  which is now or later may be security for any Secured
                  Obligation ("Other Property") marshaled upon any foreclosure
                  of the lien of this Mortgage or on a foreclosure of any other
                  lien or security interest against any security for any of the
                  Secured Obligations. Mortgagee shall have the right to sell,
                  and any court in which foreclosure proceedings may be brought
                  shall have the right to order a sale of, the Subject Property
                  and any or all of the Collateral or Other Property as a whole
                  or in separate parcels, in any order that Mortgagee may
                  designate.

         7.5      RULES OF CONSTRUCTION. When the identity of the parties or
                  other circumstances make it appropriate the masculine gender
                  includes the feminine and/or neuter, and the singular number
                  includes the plural. The term "Subject Property" and
                  "Collateral" means all and any part of the Subject Property
                  and Collateral, respectively, and any interest in the Subject
                  Property and Collateral, respectively.

         7.6      SUCCESSORS IN INTEREST. The terms, covenants, and conditions
                  herein contained shall be binding upon and inure to the
                  benefit of the heirs, successors and assigns of the parties
                  hereto; provided, however, that this Section 7.6 does not
                  waive or modify the provisions of Section 5.14.

         7.7      EXECUTION IN COUNTERPARTS. To facilitate execution, this
                  document may be executed in as many counterparts as may be
                  convenient or required. It shall not be necessary that the
                  signature or acknowledgment of, or on behalf of, each party,
                  or that the signature of all persons required to bind any
                  party, or the acknowledgment of such party, appear on each
                  counterpart. All counterparts shall collectively constitute a
                  single document. It shall not be necessary in making proof of
                  this document to produce or account for more than a single
                  counterpart containing the respective signatures of, or on
                  behalf of, and the respective acknowledgments of, each of the
                  parties hereto. Any signature or acknowledgment page to any
                  counterpart may be detached from such counterpart without
                  impairing the legal effect of the signatures or
                  acknowledgments thereon and thereafter attached to another
                  counterpart identical thereto except having attached to it
                  additional signature or acknowledgment pages.

         7.8      CHOICE OF LAW. The entire transaction contemplated by this
                  Mortgage and the Credit Agreement and all terms and provisions
                  of this Mortgage, the Credit Agreement and the other Loan
                  Documents shall be governed by the laws of the State of
                  California, except for the creation, perfection and
                  enforcement of certain lien rights and remedies provided
                  herein which must be governed by the laws of the situs of the
                  Subject Property, that being Arkansas, regarding which lien
                  rights and remedies Arkansas law shall govern.

         7.9      INCORPORATION. Exhibit A and Schedule 1, all as attached, are
                  incorporated into this Mortgage by this reference.

         7.10     NOTICES. All notices, demands or other communications required
                  or permitted to be given pursuant to the provisions of this
                  Mortgage shall be in writing and shall be considered as
                  properly given if delivered personally or sent by first class
                  United States Postal Service mail, postage prepaid, except
                  that notice of

                                 Page 15 of 20

<PAGE>

                                                             Loan No. 8079119402

                  Default may be sent by certified mail, return receipt
                  requested, or by Overnight Express Mail or by overnight
                  commercial courier service, charges prepaid. Notices so sent
                  shall be effective three (3) days after mailing, if mailed by
                  first class mail, and otherwise upon receipt at the address
                  set forth below; provided, however, that non-receipt of any
                  communication as the result of any change of address of which
                  the sending party was not notified or as the result of a
                  refusal to accept delivery shall be deemed receipt of such
                  communication. For purposes of notice, the address of the
                  parties shall be:

                  Mortgagor:       VIRCO MFG. CORPORATION
                                   2027 Harpers Way
                                   Torrance, California 90501
                                   Attn:  Robert E. Dose,
                                   Chief Financial Officer

                  Mortgagee:       WELLS FARGO BANK, NATIONAL ASSOCIATION
                                   Commercial Banking Group (AU #2702)
                                   201 Third Street, 8th Floor
                                   San Francisco, CA  94013
                                   Attn: Records Management / Team 2

                                   Loan #: 8079119402

                  With a copy to:  WELLS FARGO BANK, NATIONAL ASSOCIATION
                                   San Gabriel Valley Regional Commercial
                                   Banking Office
                                   1000 Lakes Drive, Suite 250
                                   West Covina, CA 91790
                                   Attn:  Randall J. Repp

                  With a copy to:  WELLS FARGO BANK, NATIONAL ASSOCIATION
                                   Disbursement and Operations Center
                                   2120 East Park Place, Suite 100
                                   El Segundo, CA  90245

                                   Attention: DISBURSEMENT REPRESENTATIVE

Any party shall have the right to change its address for notice hereunder to any
other location within the continental United States by the giving of thirty (30)
days notice to the other party in the manner set forth hereinabove. Mortgagor
shall forward to Mortgagee, without delay, any notices, letters or other
communications delivered to the Subject Property or to Mortgagor naming
Mortgagee, "Lender" or any similar designation as addressee, or which could
reasonably be deemed to affect the ability of Mortgagor to perform its
obligations to Mortgagee under the Notes or the Credit Agreement.

         7.11     ARBITRATION. THE PROVISIONS OF SECTION 7.11 OF THE CREDIT
                  AGREEMENT ARE INCORPORATED HEREIN IN THEIR ENTIRETY, MUTATIS
                  MUTANDIS.

                            [Signature Page Follows]

                                 Page 16 of 20

<PAGE>

IN WITNESS WHEREOF, Mortgagor has executed this Mortgage as of the day and year
set forth above.

                                  VIRCO MFG. CORPORATION, a Delaware corporation

                                  By:    /s/ Robert E. Dose
                                         ------------------
                                  Name:  Robert E. Dose
                                  Title: VP Finance

                      (ALL SIGNATURES MUST BE ACKNOWLEDGED)

                                 Page 17 of 20

<PAGE>

                                                                       EXHIBIT A
                                                             Loan No. 8079119402

                         DESCRIPTION OF SUBJECT PROPERTY

Exhibit A to Mortgage with Absolute Assignment of Leases and Rents, Security
Agreement and Fixture Filing executed by VIRCO MFG. CORPORATION, as Mortgagor to
Wells Fargo Bank, National Association, as Mortgagee, dated as of DATE OF
DOCUMENTS.

All the certain real property located in the County of PROPERTY COUNTY, State of
Arkansas, described as follows:

                                       APN

                                 Page 18 of 20

<PAGE>

                                                                      SCHEDULE 1
                                                               Loan No. LOAN NO.

                               SCHEDULE OF LEASES

Schedule 1 to Mortgage with Absolute Assignment of Leases and Rents, Security
Agreement and Fixture Filing executed by VIRCO MFG. CORPORATION, as Mortgagor to
Wells Fargo Bank, National Association, as Mortgagee, dated as of DATE OF
DOCUMENTS.

                                 Not applicable

                                 Page 19 of 20

<PAGE>

STATE OF ____________)         ACKNOWLEDGMENT
                  )
COUNTY OF ___________)

         On this day before me, a Notary Public, duly commissioned, qualified
and acting within and for said county and state, appeared in person the within
named ______________, being the _____________ of VIRCO MFG. CORPORATION, a
Delaware corporation, and who had been designated by said corporation to execute
the foregoing instrument, to me personally well known, who stated that he/she
was the ______________ of VIRCO MFG. CORPORATION, and was duly authorized in
his/her capacity to execute the foregoing instrument for and in the name and
behalf of said corporation, and further stated and acknowledged that he/she had
so signed, executed, and delivered said foregoing instrument for the
consideration, uses and purposes therein mentioned and set forth.

         IN TESTIMONY WHEREOF, I have hereunto set my hand and seal this _____
day of __________, 20___.

                                  NOTARY PUBLIC

My Commission expires:

                                 Page 20 of 20

</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
